Mumbai: A law which will empower bankers at state-owned lenders to take decisions without fear of consequences (including the threat of investigation by federal agencies) is currently in its final stages of drafting and will reach Parliament shortly, finance minister Arun Jaitley said on Tuesday.
“The law is in its last phases and is in front of the standing committee. We should see it happen soon," Jaitley said while speaking at State Bank of India’s (SBI) third banking and economics conclave.
According to the finance minister, while a lot has been done to ensure greater level playing field between public sector and private sector bankers, the former are constricted by “obsolete laws".
Jaitley was specifically referring to the 1988 Prevention Of Corruption Act that restricts public sector employees, especially bankers, from taking radical and quick decisions. “A private sector banker may take decisions purely on banking considerations. Fear of consequences at times dilutes potential of leadership (in public sector)," the finance minister said.
State-owned bankers are usually cautious before taking tough calls to manage bad loans, especially while taking haircuts by selling them to stressed asset managers. Public sector lenders account for a lion’s share of the Rs6.3 trillion toxic loan pile in the Indian banking system.
In June, after a review meeting of state-owned banks and financial institutions, Jaitley said the government will take steps to protect and empower state-run banks to take commercially prudent decisions in dealing with bad debts.
The government should do more, maybe even put some more equity into state-owned banks, said Nirmal Gangwal, managing director, Brescon Corporate Advisors Ltd, a restructuring and turnaround firm. “While it is good that some of the fear of consequences is being taken care of, one major problem is also tough provisioning requirements that bankers face on stressed asset management. That is counterproductive. If you want to continue with tough provisions, you must also then provide capital to cover for it."
To be sure, fear of consequences is not the only reason that prevents state-owned bankers from taking decision purely on banking considerations.
As former governor Raghuram Rajan pointed out last month, public sector banks also have to follow government diktats such as opening Pradhan Mantri Jan Dhan Yojana accounts and extend MUDRA loans for micro units and follow rigid hiring rules which hamper their functioning.
“Some of the differences between public and private banks can be mitigated if the government pays an adequate price for (carrying out its) mandates," Rajan had said.
The stress in the system is among the most significant challenges facing the economy, Jaitley said.
“Usually we are asked two questions. One about the implementation of GST (goods and services tax), which we think we have adequately answered, and the second, (about) the health of the public sector banks," Jaitley said.
Credit growth has sputtered to below 10% in recent times and the high bad loan problem has also made banks hesitant to lend.