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Business News/ Industry / Banking/  Govt to push bank reforms, may encourage mergers
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Govt to push bank reforms, may encourage mergers

The government is also reviewing its practice of signing MoUs with banks at the start of the year

SBI received almost half of the total government infusion in state-run banks in 2014-15. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint )Premium
SBI received almost half of the total government infusion in state-run banks in 2014-15. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint )

New Delhi/Mumbai: The Narendra Modi government has decided to initiate changes aimed at revitalizing India’s ailing state-run lenders, including encouraging mergers, empowering their boards and offering higher cash incentives to banks for meeting targets.

The government is also reviewing its practice of signing memoranda of understanding (MoUs) with banks at the start of the year. Instead, it will now stress on giving cash incentives to banks if targets are achieved.

“As a promoter, the banks have been entering into an MoU for achieving certain objectives known as statement of intent. The whole system of statement of intent is being revised with provision for higher cash incentives," said a post-budget press note by the government, without elaborating on the revised criteria.

Currently, lenders set annual targets for themselves on parameters such as business growth, return on asset and asset quality indicators in the accords they sign with the government.

The press note criticized the performance of state-run banks, terming it sub-optimal.

“The government is taking various steps to improve the situation both on governance side and otherwise. The focus of these reforms is to improve the quality of deliberations in bank boards, leading to better asset quality and further resulting in better market valuations," the press note said.

The government is aiming to improve the health of these banks to boost credit growth and prepare the lenders to meet tighter capital requirements. Stressed assets at state-run banks surged to 12.9% of total lending as of 30 September, the highest level since 2001, according to the Reserve Bank of India. In comparison, the ratio for private sector banks stood at 4.4%. The situation has likely worsened in the following December quarter.

The price-to-book value (PBV) ratio for most public sector banks is 0.5-0.7, as markets have discounted these stocks because of the surge in bad assets. Private sector banks have a PBV ratio above 2.

Performance of banks have come to the fore after the government refused to recapitalize inefficient banks. The present budgetary allocation towards bank capitalization is also much lower than what the banks expected.

The government on 7 February said it will infuse only 6,990 crore in nine public sector banks in 2014-15, based on efficiency, against 14,000 crore in 2013-14.

The country’s largest lender State Bank of India (SBI) received almost half of the money— 2,970 crore—out of the total allocation. In the budget for fiscal 2015-16, the government has earmarked only 7,940 crore for public sector banks, which is highly unlikely to be distributed to all banks, continuing with the latest efficiency parameters.

Justifying the government’s decision to reduce the capital allocation for banks in 2015-16, finance minister Arun Jaitley said that banks have been given the freedom by the government to go to the market and raise funds after the government decided to reduce its stake in state-run banks to 52%.

Analysts say that banks that continue to not get capital will have to eventually go for a merger with a larger lender. At the least, banks with less capital may have to shrink their balance sheet, or at least grow at a slower pace, if government does not support them with capital, they said.

The press note clearly pointed out that mergers could be in the government’s mind.

“The government wants to encourage bank boards to restructure their business strategy and also suggest way forward for their consolidation and merger with other banks if it’s a win-win for both," the press note said.

The government will go for a merger only as a last resort, said Ananda Bhoumik, senior director and head of financial institutions at India Ratings and Research.

“It is a deliberation and not a roadmap, so there is a lot that needs to go before it can be finally said merger is on. The government is trying to make the bank boards more efficient, delegating the duties to the boards to find a future for the bank. By doing this, if a bank becomes efficient, the need for merger goes," he said.

“It is rather an admission that so far, boards were inefficient and they need to pull up their socks," Bhoumik said.

The government will reconstitute the bank boards and will ensure that only people with relevant expertise are part of bank boards.

“Guidelines relating to appointment of non-official directors is being revisited to ensure bank boards get people with relevant expertise. Anybody eligible would be able to apply through a website which will soon be available in the public domain," the press note said.

The Union Budget on Saturday had said that an independent bank board bureau will be set up, which will appoint bank chiefs. The board will be an interim step towards setting up a full-fledged bank investment company.

The bank investment company or a financial holding company will own shares of all public sector banks. Both were suggested in a report submitted in May 2014 by the P.J. Nayak committee on governance in bank boards.

A senior banker with a Mumbai-based public sector lender said the reconstitution of bank boards was necessary as many a time, banks’ critical decisions get hampered for personal gains by unqualified people in the board. He cited the interference of chartered accountants appointed under government regulations in the bank’s loan-sanctioning committee.

“With the bank board reconstituted and manned by experienced people, these kinds of interferences can be rooted out," said the banker, whose bank did not receive capital in the present financial year.

The government has already separated the posts of chairman and managing director, and introduced enabling provisions that permitted officials from the private sector to be eligible for appointment in five state-run banks. Also, the whole interview process has been revamped based on the recommendations of a government panel headed by expenditure secretary Ratan Watal.

“The government is trying out everything to enable banks to achieve certain level of efficiency. If everything else fails, then the issue of merger may come into the picture," said Bhoumik, adding: “It is not easy to merge banks because why should a strong bank want to merge with an inefficient bank?"

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Published: 02 Mar 2015, 12:09 AM IST
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