Reforms on for state-run banks but govt won’t cede control3 min read . Updated: 15 Jul 2014, 12:09 AM IST
Financial services secretary G.S. Sandhu says administrative reforms for PSU banks are at a fairly advanced stage of discussions
New Delhi: The government is considering administrative reforms at state-run banks, including separating the post of chairman and managing director and giving them a fixed term of five years, but is not considering lowering its stake in these lenders below 51%.
The reforms are aimed at improving the functioning and competitive edge of the institutions that account for 70% of banking industry assets.
The government could also specify criteria such as educational qualifications and experience for independent directors appointed to bank boards to improve corporate governance.
G.S. Sandhu, secretary, financial services, in the ministry of finance, said the measures are at a fairly advanced stage of discussions.
“After we finalize the proposal, it will go to the appointments committee of cabinet for approval," he said in an interview.
A fixed tenure to bank chiefs for better accountability was one of the recommendations of a panel set up by the Reserve Bank of India (RBI) under former Axis Bank Ltd chairman P.J. Nayak. In its report, submitted in May, the panel also called for privatization or mergers of state-run banks and a change in the governance practices to ensure that these banks remain competitive.
Currently, only the chairperson of State Bank of India (SBI), the country’s largest lender by assets, has a fixed tenure of three years.
“It is a step in the right direction but needs to be accompanied with tangible action," said Robin Roy, associate director, financial services, PricewaterhouseCoopers. “It will empower the management to take quicker decisions. Fixing of tenures means that the chief of the bank can implement the decisions and see its results."
Sandhu said the government was still considering the recommendations of the Nayak committee. It has, however, decided not to accept a recommendation that the government lower its stake in state-run banks to below 51%.
“On disinvestment, the government is of the view that its stake in state-run banks should not be less than 51%. At this stage, that is a clear view," he said. “Other issues will take some more time for the government to examine."
Finance minister Arun Jaitley, in his 10 July budget speech, had said the government will look at gradually reducing its shareholding in banks to meet the Basel III international norms for banks’ capital adequacy, mainly through retail share sales. Capital adequacy, expressed as a ratio of capital to risk-weighted assets, is an indicator of banks’ financial strength.
State run banks are estimated to require ₹ 2.4 trillion in the next five years to meet additional capital adequacy requirements. Pressure on government finances means the requirement cannot be met by budgetary outlays.
The department of financial services is currently in the process of drawing a divestment roadmap on the basis of each bank’s capital requirement and valuation.
SBI Capital Markets Ltd, an arm of SBI, has finished an initial valuation exercise for the government, Sandhu said.
“Higher the retail participation, more will be the diversified ownership and more the shareholder activism," said Roy.
The government is also looking at various ways to consolidate the Indian banking industry. Despite its profusion of banks, many state-owned, India doesn’t have a single bank in the top 50 banks in the world by assets.
Sandhu added the banking consolidation process is likely to be kicked off by SBI with its subsidiaries and followed by the merger of smaller or problem-ridden banks such as Dena Bank and United Bank of India.
“We would like to take up initially mergers that are most merit-based. SBI and its subsidiaries could be one, and probably banks that are facing problems in their current form," he said. “The banks have not been shortlisted yet, but many banks were part of the earlier scheme that was worked out by the government....United Bank of India, Dena Bank and some other southern banks."
He added that consolidation will be a gradual process. “Maybe we will take up one or two banks this year and the rest will follow," he said.