Deputy Governor SS Mundra on August 24 said while the immediate priority is to complete the clean-up of PSU banks’ balance sheets which is underway, simultaneously, process has to continue to bestow greater “governance autonomy” to these banks.
“My sense is that the Government ownership...
of these banks has resulted in crucial stability and resilience in trying times. Immediate roadmap should, therefore, be towards complete “managerial autonomy”. If Government remains the largest shareholder, not necessarily majority shareholder, it still serves the intended purpose. At the same time, it releases these banks from multi-institutional oversights and overlapping controls,” Mundra said.
Mundra’s comments assume significance amidst mounting bad loans, Finance Minister Arun Jaitley will hold a meeting with the heads of public sector banks on September 16 to find ways to deal with the situation. He will review the first quarter performance of public sector banks and financial institutions on September 16.
“HR autonomy would naturally flow from the above. Banks would be able to move towards competitive compensation, flexible hiring and move away from the “collective bargaining”… just to quote a few from many possible outcomes,” he said while addressing the Banking Reforms Conclave 2016 organised by Governance Now in Mumbai.
After the clean-up, resultant provisioning needs coupled with meeting Basel III norms/ migration to IFRS and to capture due market share in growth funding would entail recapitalisation of most of these banks.
“Seeking this capital externally at this stage may be difficult as also value eroding for the majority owner,” he said.
Similarly, some of the reforms are driven by a global reform structure. These relate to capital, liquidity and disclosure standards under the Basel III package.
“Some such other measures are TLAC, SIBs, misconduct rules, etc. Few other measures are currently under discussion, such as, imposing risk weight on sovereign exposure and new standardised approach for credit and operational risk,” Mundra said.
On governance in banks, he said some action have already been taken. This included setting up of the Banks Board Bureau (BBB), splitting the post of CMD into a non-executive Chairman and a CEO and the selection process made more objective.
“Going forward, BBB should also cover selection of other board members. Continuity of top management is crucial… hence reasonably longer tenure for CEO (say 5 years) is necessary. Initial appointment could be for three years with certain set milestones, which if achieved, should earn automatic extension for next two years,
“An orderly succession plan is crucial to ensure no abrupt changes in key direction of the organisation,” Mundra said.
Gross NPA of the PSU banks have surged from 5.43 per cent (Rs 2.67 lakh crore) in 2014-15 to 9.32 per cent (Rs 4.76 lakh crore) in 2015-16.
As per the latest Financial Stability Report by RBI, the Gross Non-Performing Assets ratio for public sector banks may go up to 10.1 per cent by March 2017 under the baseline scenario.
A number of PSU banks including Bank of India, Dena Bank, and Central Bank of India, reported losses for the quarter ended June 30, due to a sharp jump in provisions for NPAs on account of an asset quality review mandated by the RBI in December.
Country's largest lender SBI witnessed a 78 per cent drop in consolidated profit to Rs 1,046 crore as against Rs 4,714 crore profit in the same quarter a year ago. Besides, Bank of Baroda, Andhra Bank and Union Bank of India among others posted massive decline in profit.
In a bid to shore up cash-strapped public sector banks, the government last month announced infusion of Rs 22,915 crore capital in 13 lenders including SBI and Indian Overseas Bank to revive loan growth that has hit a two-decade low.