Will to reform
Prime Minister Narendra Modi’s call for greater professionalism and operational independence in public sector banks is welcome. In light of the ‘unacceptable’ level of bad assets in the system, the ruling establishment has promised more autonomy for state-run banks to run business with a “commercial mind set”, which would allow them to hire the best talent. Considering that the government is a majority owner in 27 public sector banks that controls over 70 per cent of the system, a move towards key structural reforms is long overdue. Recently, a RBI-appointed panel led by former Axis Bank chairman PJ Nayak came out with its report on rising bad loans in state-controlled banks. The overarching narrative in the PJ Nayak panel report was that bad assets in state-owned banks have risen due to rising government interference. As per latest figures, non-performing assets (NPA) touched Rs 2.43 trillion for 40 listed banks, a rise of 36 per cent over its previous year. These figures could have been much higher had a large chunk of loans, worth Rs 5-6 trillion, not been restructured. Politicians have been known to use public sector banks to finance some unfeasible projects in their constituencies under the garb of social responsibility. Removal of such hindrances will go a long way in improving the health of public sector banks. The aim must be avoid excessive dependence on the government for recapitalisation. In light of these requirements, the government has presented public sector banks with the option of offloading its own share and reinvesting the proceeds of the sale into these financial institutions at prevailing market rates. Though privatisations may not be a viable option, one way to prevent government interference in banking operations, according to the panel report, will be if the government can transfer its stake to a holding company known as the bank investment company (BIC). For the time being, these are all plausible solutions. The government, however, must display the requisite political will to fix our public sector banks.