PSU bank reform - Chasing a rainbow

Indradhanush - the seven-fold set of reforms announced by the finance ministry, turned out to be repackaging already well publicised measures:  Appointments, bank boards, capital, de-stressing empowerment, framework of accountability and governance reforms, let us take them one by one.We knew of the Appointments – barring the couple of private sector appointments there isn’t much that might make a difference. The eminent men selected as chairmen will hopefully make a difference by refusing to allow political meddling, but we will have to wait and see.The FM announced that the bank boards bureau will be set up by April 2016. The bureau, to be comprised of three government officials and three external experts, can ensure professionalism in all appointments, though a government bent on destroying institutions can always stuff the bureau with yes men and continue the cronyism. The capital is barely enough for now and has already been discounted by the market.For me, the framework of accountability of PSU banks to the government appears to be the big change. It has distinctly changed in favour of profitability metrics from the old topline and balance sheet growth metrics. Some bankers say that for the past two years the government hasn't been stressing on topline growth. But never before have ROE and ROA targets been insisted upon. Some bankers complain that the asking rate of growth in ROEs of 3 percentage points higher in a year, is a tall ask, especially if your ROE is already in double digits.. But these details apart, if profitability metrics get into the DNA of bankers, PSU banks may eventually become much better run organisations.The second big announcement , as part of governance , was the hint that performance incentives and ESOPs will be considered for the top bank mangers. If the government is serious about this, it can become a big engine for growth. As of now, in PSU banks, other than SBI, Executive Directors and Chairmen earn less than general managers. That is because GMs come under the tripartite wage agreements, while compensation of EDs and Chairmen is decided by the pay commissions. Retried chairmen told me how finance ministry officials connive and scheme to deny bank chairmen any increments. The whole attitude towards PSU banks at North Block is that “they are our terrain”, said this retired banker. Any effort to give bank chairmen more pay or perks than IAS officers in the ministry is shot down, he said.And “empowerment”? Every Wednesday a joint secretary in the finance ministry holds a conference call with all bank EDs on Jandhan and reprimands them roundly if targets aren’t met. Is this empowerment, ask bankers. 96% of the Jandhan accounts are opened by PSU banks, though they account for 70% of the banking sector. Did any official in North Block ask the private banks why they haven’t opened 30 percent of the Jandhan accounts? Now everyone knows a zero-balance account is a cost. The profitability of all banks that have opened a surfeit of Jandhan accounts has already gone down a few basis points below their private sector counterparts who have no such obligations. In the past, the UPA governments set farm loan targets, this NDA has set Jandhan targets. Is it fair then to expect PSU banks to match private sector banks’ profitability targets.The only way PSU bank managements can be taken out of the day-to-day control of North Block and the government is if the government stake in them is brought down below 51 percent. That will allow them to recruit laterally, take decisions free them from the oversight of the CAG and the CVC and also remove their compensation from the IAS lobby in north block. Under the current dispensation, any talk of empowerment of PSU bankers and merit-based compensation is hogwash.Finally the only big positive announcement at the Friday Indradhanush press conference was the efforts to control bad loans. We were told power minister Piyush Goyal has met the chief ministers of two staets with the weakest discoms – Rajasthan and Haryana. Rajasthan has huge T&D losses and rectifying them is not a day’s job or even a year’s job. Bankers say in some areas in UP even metering is impossible because these areas are out of bounds of the law. How much political will, can these chief ministers summon to rectify their discoms remains to be seen.The FM said he has told the states that discoms can’t be funded indefinitely by banks. It remains to be seen if he will be as good as his word. Currently there is pressure on RBI to grant forbearance to banks if they restructure discom loans. RBI has refused to budge. Will North Block refrain from armtwisting RBI on this issue, we will have to see.Jayant Sinha, speaking on our channel said the government is open to using some of the funds of the NIIF (the national infrastructure and investment fund) to set up sector funds like power funds, which can provide the equity in trouble projects. He specifically said a TARP like structure can be thought of. A TARP or a troubled assets relief program in the US was nearly USD 430 billion, a little less than 1 percent of the US GDP. The NIIF is to have seed capital of Rs 20,000 crore and even with debt funding may increase to Rs 80,000 crore. A small part of this may be used to help trouble assets. Considering that the NIIF hasn’t even been set up, to believe this fund will eventually reduce NPLs is too optimistic. And in steel, I doubt the ministry is even seized of the mammoth size of the problem, considering that Mr Sinha and Mr Jaitley merely refered to the 2.5 percent rise in import tariffs as a solution.Despite my misgivings, PSU bank shares may continue their rally for a bit, but for those of us who are waiting for a transformation of these banks into truly commercial entities, the wait is going to be much longer.