Tag: Public Sector Banks | Page 6

2 March, 2016

Mr Jaitley, Until When Will Govt Continue To Support Public Sector Banks?

The Economic Survey released on February 26 had a very interesting number in it. It pointed out that between 2009-2010 and the first half this financial year, the government had infused a capital of Rs 1.02 lakh crore into public sector banks.

And it ain’t done with it as yet. As finance minister Arun Jaitley said in his budget speech earlier today: “We are now confronted with the problem of stressed assets in Public Sector Banks, which is a legacy from the past. Several steps have already been taken in this regard…To support the Banks in these efforts as well as to support credit growth, I have proposed an allocation of Rs 25,000 crore in 2016-17 towards recapitalisation of Public Sector Banks. If additional capital is required by these Banks, we will find the resources for doing so. We stand solidly behind these Banks.”

This means that the government will continue to pour money into public sector banks. Jaitley has clearly said that the government will invest as much money as it takes in order to recapitalize public sector banks.

The stressed loans of public sector banks as on September 30, 2015, stood at 14.2% of the total loans. Hence, for every Rs 100 of loans given by public sector banks, Rs 14.2 has either been declared to be a bad loan or has been restructured. In March 2015, the stressed assets were at 13.15%.

A restructured loan essentially implies that the borrower has been given a moratorium during which he does not have to repay the principal amount. In some cases, even the interest need not be paid. In some other cases, the tenure of the loan has been increased.

Further, the public sector banks have been under-declaring their level of bad loans by restructuring loans and kicking the can down the road. Nearly 40% of the restructured loans have gone bad over the last two to three years. This means many restructured assets will continue to go bad in the years to come.

With bad loans and restructured assets accumulating the public sector banks will continue to need fresh infusion of capital. Also, estimates made by the PJ Nayak Committee suggests that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.” The committee further said that: “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.”

The government on the other hand estimates that “the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore.”

Both the estimates are very large and have the potential of really screwing up the fiscal deficit number of the government in the years to come. Fiscal deficit is the difference between what a government earns and what it spends.

This is a clear impact of the government continuing to own 27 public sector banks. Narendra Modi in the run up to the 2014 Lok Sabha elections had promised “minimum government maximum governance”. This promise has clearly gone out of the window. It is visible in the fact that the government continues to own so many public sector banks.

The tendency in the government is to look at shares of public sector companies as family silver. And given the bad state of the stock market currently, this family silver cannot be sold.

But the trouble is that any government can only do so much. And given the problems that the Indian economy is currently facing, this government is clearly overextending itself in trying to save each and every public sector bank.

Jaitley also taked about operationalising the Bank Bureau Board in 2016-2017. This Bureau expected to search and select heads, wholetime directors and non-executive chairmen of public sector banks. The idea is to professionalise the public sector banks.

Jaitley further said: “The process of transformation of IDBI Bank has already started. Government will take it forward and also consider the option of reducing its stake to below 50%.” Does this mean privatisation of IDBI Bank? It doesn’t seem like that.

Recently, IDBI Bank made public, plans of raising Rs 1500 crore from the Life Insurance Corporation(LIC) of India. LIC currently owns 7.25% of the bank. With this new issue of shares, the LIC holding in the bank will increase to around 19%. If this is the route that Jaitley plans to reduce the stake of the government below 50% in IDBI Bank, then this can’t be really called privatisation. It is essentially moving money from one arm of the government to another arm, something the Congress led UPA government used to specialize in.

The moot question is why does the government need to own 27 public sector banks? It’s social sector obligations can easily be fulfilled by continuing to own SBI and a few other banks, depending on which bank is strong in which part of the country.

In his speech Jaitley also talked about bringing a comprehensive legislation for tackling the Ponzi scheme menace, though he did not use the word Ponzi anywhere. It is difficult to comment on this right now given that no details are known. Nevertheless, it will be interesting to see how different this new legislation will be from the ones already in place and whether it will actually lead to the number of Ponzi scheme launches coming down.

Jaitley also talked about the government facilitating the deepening of corporate bond market, in his speech. This is something several finance ministers have talked about in the past. He also talked about amending the RBI Act 1934 to provide a statutory basis for Monetary Policy Committee. Once the Committee is in place the decisions on repo rate changes will be made by the Committee, instead of just the RBI Governor, as is currently the case.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on SwarajyaMag on February 29, 2016

16 February, 2016

Taxpayers will have to Pick-Up the Final Bill of the Mess in Govt Banks

In a column I wrote last week I said that I was happy that the profit of the State Bank of India, the country’s largest bank, had fallen by 62%. Along the same lines I need to say that I am happy that the Bank of Baroda has made a loss of Rs 3342 crore, for the period October to December 2015. This is the biggest loss ever made by any Indian bank. In fact, the losses would have been higher if not for a Rs 1,118 crore tax write-back that the bank got.

Over the years, banks have not been recognising bad loans as bad loans. This process that has started now and is bringing out the real state of the Indian public sector banks and that is a good thing. In case of Bank of Baroda, the gross non-performing loans (or bad loans) of the bank jumped by 152% to Rs 38,934 crore, in comparison to as on December 2014. In percentage terms, the bad loans as of December 2015 stand at 9.68% of total lending in comparison to 3.85% in December 2014.

What this clearly tells us is that the Bank of Baroda, like the other public sector banks, had been under-declaring its bad loans up until now. This can be easily said from the fact the bad loans as a percentage of total loans, as on September 2015, had stood at 5.56%. By December 2015, this had jumped up by 412 basis points to 9.68%. One basis point is one hundredth of a percentage.

The situation could not have become so bad over a period of just three months. This clearly tells us that the bank had not been putting out the correct situation of its loans earlier. But now that it is, the stock market is clearly happy about it, with the stock rallying by 22% to Rs 139.55 as on February 15, 2016.

It needs to be pointed out here that the public sector banks are finally getting around to presenting the right set of accounts because the RBI led by Raghuram Rajan has pushed them to do so, by unleashing the asset quality review on to them.

As Rajan pointed out in a recent speech: “ With markets generally in decline, the decline in bank share prices has been more accentuated. However, part of the reason is that some bank results, mainly public sector banks, have not been, to put it mildly, pretty. Clearly, an important factor has been the Asset Quality Review (AQR) conducted by the Reserve Bank and its aftermath.”

This leads to the question as to what was the RBI doing all these years, especially in the pre-Rajan years given that such a huge build-up of bad loans couldn’t have happened overnight.

Also, it needs to be clarified here that a bad loan doesn’t mean that the bank has lost all the money. This seems to be the general understanding and is incorrect. A loan is typically declared to be a non-performing asset (or a bad loan), 90 days after the borrower starts defaulting on the interest and principal payments. When this happens a bank can no longer continue to accrue interest on the portion of the loan that remains unpaid. It has to start making provisions i.e. start keeping money aside.

This basically means that the bank starts keeping money aside so that if the loan is totally defaulted on or partially defaulted on or the bank cannot recover enough money from the assets that it has as a collateral, then enough money has been set aside to meet the losses.

Along these lines, the Bank of Baroda has increased its provisioning. For October to December 2015, the bank set aside Rs 6,165 crore. This is an increase of 389% in comparison to the money it had set aside for September to December 2014.

The question is even with this huge jump in provisioning, is the bank setting aside enough? The Reserve Bank of India(RBI) Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances: “Banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn. This will enhance the soundness of individual banks, as also the stability of the financial sector. It was, therefore, decided that banks should augment their provisioning cushions…and ensure that their total provisioning coverage ratio…is not less than 70 per cent.”

The provisioning coverage ratio is defined as the total provisions set aside by a bank as on a particular date divided by the total gross non-performing assets (bad loans) of the bank as on the same day.

The RBI wants banks to maintain a provision coverage ratio of 70%. But that doesn’t seem to have happened. In fact, as a recent news-report in The Indian Express points out: “An analysis of provisioning coverage ratio data of 20 public sector banks for March 2011 to March 2015 shows a steady fall in the coverage ratio. It has dropped from an average of 72 per cent for the group of 20 banks in the year-ended March 2011 to 57 per cent for the year-ended March 2015.”

In fact, for Bank of Baroda, the provisioning coverage ratio as on March 31, 2015, had stood at 64.99%. Since then, despite the absolute jump in provisioning, the provisioning coverage ratio of the bank has fallen to 52.70%. So, the bank clearly is not setting aside enough money against its bad loans, even though its setting aside more money in absolute terms, than it has done in the past.

How do things look for other banks? Let’s take the case of Punjab National Bank, the second largest public sector bank. The provisioning coverage ratio of the bank as on March 31, 2015, was at 58.21%, since then it has fallen to 53.85%. The same is the case with the State Bank of India. The ratio has fallen from 69.13% to 65.23%.

So none of the bigger public sector banks are fulfilling the provisioning coverage requirement of 70% as required by the RBI. What this tells us is that if the banks work towards achieving this ratio in the coming quarters, the losses of these banks will only go up. This would also mean eating into the capital of the bank.

Also, it is worth asking here what portion of the bad loans will the public sector banks be able to recover? The answer is not encouraging if we look at the numbers of the two biggest banks—the State Bank of India and the Punjab National Bank.

During the course of this financial year, the State Bank of India has managed to recover loans of Rs 2,761 crore. During the period its bad loans jumped up from Rs 56,725 crore to Rs 72,792 crore.

How do things look for Punjab National Bank? During the course of this financial year, the bank has managed to recover loans worth Rs 6,382 crore. During the same period, the bad loans of the bank have jumped from Rs 25,695 crore to Rs 34,338 crore. For both, State Bank of India as well as Punjab National Bank, there has been a huge jump in the loans recovered in comparison to April to December 2014. Nevertheless, the total amount of bad loans has gone up as well, in effect negating the recoveries. And this doesn’t augur well for the banks.

My guess is that public sector banks losses will eat into their capital in the months and years to come and the government (i.e. the taxpayer) will have to keep coming to their rescue by infusing fresh capital into these banks. Since 2010, the government has pumped in Rs 67,734 crore into public sector banks. It will have to put in a lot more money in the days to come.

As Michael Pettis writes in The Great Rebalancing: “Traditionally the cost of a banking crisis is borne directly or indirectly by households. Whether it is in the form of foregone deposits, government bailouts funded by household taxes…Households always foot the bill for banking crisis.”

The situation in India will be no different.

The column was originally published in the Vivek Kaul Diary on Equitymaster on February 16, 2016

4 December, 2015

Does The RBI Really Think Banks Are Cleaning Up Their Balance Sheets?

The fifth monetary policy statement for the current financial year (2015-2016) was released by the Reserve Bank of India (RBI) earlier this week. In this statement the RBI points out that since the beginning of this year, the repo rate has been cut by 125 basis points (one basis point is one hundredth of a percentage). Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.

When the RBI cuts the repo rate it is expected that the banks will follow suit. As banks cut interest rates, the expectation is people will borrow more. But that doesn’t seem to have happened. Bank lending growth has continued to be in single digits. While the RBI has cut the repo rate by 125 basis points, the bank have cut their interest rates by only 60 basis points, which is less than half of RBI’s cut.

One of the reasons for this is that the bad loans have been piling up at banks, especially public sector banks. This hasn’t allowed banks to cut interest rates at the same pace as the RBI has cut the repo rate. Higher interest rates are being used to generate income which can compensate for losses on account of bad loans.

The RBI in the monetary policy statement is hopeful that “the on-going clean-up of bank balance sheets will help create room for fresh lending.” What this means is that once banks are able to clean up their balance sheets i.e. bring down their bad loans, they will be able to lower their interest rates and in the process greater lending will happen.

But how likely is this? The RBI declares the sectoral deployment of credit data every month. In this it gives out details of how much money was lent by banks to different sectors of the economy. Between October 2014 and October 2015, the banks have lent around Rs 1,15,800 crore to industry. This is an increase of 4.6%. Between October 2013 and October 2014, the lending to industry has gone up by 7.8%.

So far so good. Within industry, banks have lent Rs 73,500 crore to the infrastructure sector. Within the infrastructure sector, banks have lent Rs 55,600 crore to the power sector. Lending to iron and steel increased by Rs 22,200 crore between October 2014 and October 2015.

Hence, lending to the power sector and iron and steel sector was at Rs 77,800 crore. Given this, nearly two-thirds of all industrial lending by banks during the last one year has been to power and iron and steel companies. If we consider the entire infrastructure sector along with the lending to the iron and steel companies, then banks have carried out 82.6% of their industrial lending over last one year to companies operating in these sectors.

And why is that a problem? The RBI Financial Stability Report, which is released twice a year, with the last edition being released in June earlier this year, points out: “Five sub-sectors, namely, mining, iron & steel, textiles, infrastructure and aviation, which together constituted 24.8 per cent of the total advances of scheduled commercial banks, had a much larger share of 51.1 per cent in the total stressed advances. Among these five sectors, infrastructure and iron & steel had a significant contribution in total stressed advances accounting for nearly 40 per cent of the total.”

The power sector is a part of the infrastructure sector and a big defaulter of bank loans. Power sector loans form a little over 8% of total banks loans. Nevertheless they form 16.1% of the stressed advances.

Stressed advances are essentially gross non-performing assets (or bad loans) of banks plus restructured loans divided by the total assets held by the Indian banking system. The borrower has either stopped to repay this loan or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan by increasing the tenure of the loan or lowering the interest rate.

What does this tell us? Basically 40% of the stressed advances of banks come from companies operating in the infrastructure and the iron and steel sectors. Ironically, banks have carried out more than 80% of their industrial lending to companies operating in these sectors, in the last one year.

Hence, banks are lending money precisely in those sectors where they have been losing money. Why are they doing that? A possible explanation is that new loans are being given so that the older loans that are falling due can be repaid. The companies operating in these sectors do not have the money to repay the loans they had taken on. In the process, the problem of recognising bad loans can be controlled, and the banks can kick the can down the road.

As the Financial Stability Report points out: “The debt servicing ability of power generation companies [which are a part of the infrastructure sector] in the near-term may continue to remain weak given the high leverage and weak cash flows. Banks, therefore, need to exercise adequate caution while dealing with the sector and need to continue monitoring the developments very closely.” What explains banks giving out more loans precisely to these companies?

With regard to the iron and steel sector the report had said that “the sector holds very good long term prospects, though it is currently under stress, necessitating a close watch by lenders.”

In fact, despite giving out fresh loans to the troubled sectors, the bad loans of banks have been on their way up. A recent newsreport in the Mint pointed out that bad loans of banks had risen to Rs 2,85,000 crore as on September 30, 2015. This was 22.9% higher than the total bad loans of banks as on September 30, 2014.
A report in The Indian Express puts the bad loans of banks at Rs 3,36,685 crore as of September 30, 2015. This is a rise of 27% from last year.

The RBI governor Raghuram Rajan recently said: “I want to put something like March 2017 on the table as when we hope that a full clean-up will have been done.” Is he being a little too optimistic here? That only time will tell.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on HuffPost India on Dec 3, 2015

5 November, 2015

One last time: The govt shouldn’t be running 27 banks

In yesterday’s edition of The Daily Reckoning I explained why the privatisation of IDBI Bank is a test case for the Narendra Modi government.

The other important point that I made in the column (and have made in the past) and will make again today is that there is no reason the Modi government (or for that matter any other) should be running 27 public sector banks.

Let me first explain why I am making this point again today. Yesterday’s edition of The Times of India had a news-report headlined “Govt looks at 3 options to reduce stake in IDBI Bank“. This news-report talks about the three options the government is looking at in order bring down its stake in IDBI Bank.

While a decision on how the shares of IDBI Bank will be disinvested hasn’t been made, the three ways the government is looking at are: a) to sell the shares in small lots to the public through the stock exchanges. The trouble with this option is that the government may not be able to sell the shares at the best possible price.

b)The second option being considered is to sell the IDBI Bank shares to the likes of Life Insurance Corporation (LIC) of India, other government owned insurance companies and pension and provident funds, at a premium to the current market price. This option, as has often been the case in the past, is taking the easy way out.

c) The third option (which is very similar to the second option) being considered is to sell shares to public sector banks and financial institutions. This was tried in the case of Maruti Suzuki in 2005-2006. A PTI news-report published on January 12, 2006 points out: “The government today sold 8% shares in MarutiUdyog for Rs 1,567.60 crore with Life Insurance Corporation (LIC) picking up more than 50% of the 2,31,12,804 shares sold by the government. LIC successfully bid for 1,68,00,000 shares at Rs 682 per share. Eight public financial institutions have picked up Maruti shares. SBI would be getting 39,27,074 shares at Rs 660 per share.”

None of these methods will lead to genuine privatisation. If the government sells shares to the general public through the stock exchanges, it will continue to remain the majority owner of shares in the bank. And that is the basic problem. As I had pointed out in yesterday’s column, the private sector banks are much better run and more profitable than their public sector counterparts.

Currently, the government owns 76.5% of the IDBI Bank. Even if it were to reduce its shareholding to 49%, it will still continue to be the biggest shareholder in the bank. With government ownership comes political corruption, crony capitalism and bad lending, which leads to bad loans. This story has played out over the last few years.

In fact, the net non-performing assets of public sector banks, for the financial year ending on March 31, 2015, stood at 2.92% of their total advances (i.e. loans). It was at 2.01% for the financial year ended March 31, 2013. In comparison, the private sector banks are extremely well placed with their net non-performing assets being at 0.89% of their total advances. For financial year ending on March 31, 2013, the net non-performing assets of these banks stood at 0.52%.

What this clearly tells us is that the private sector banks are better at lending money given that they don’t have to deal with political corruption and crony capitalism. In a poor country like India it is important that any money that is being lent is utilized properly as far as possible and is not siphoned off by greedy businessmen. It has become clear over the last few years that businessmen find it easy to siphon off money they have borrowed from public sector banks in comparison to private sector banks.

The second option being considered by the government is to sell shares to LIC. The interesting thing is that LIC already owns 8.59% of the bank. Does it make sense to allow LIC’s investment in any stock to go beyond 10%? The Securities and Exchange Board of India does not allow mutual funds to own more than 10% of a company. This is to prevent concentration of risk on the overall investment portfolio. But this does not apply to LIC, given that it is an insurance company.

The question is why is the government allowing this concentration of risk in LIC’s investment portfolio to happen? Ultimately like mutual funds, LIC is also basically managing money.

Further, it is also important to state here that the money that LIC has is not government’s money. LIC manages the hard earned savings of the people of India and given that these savings need to be treated with a little more respect.

Also, selling shares to LIC or the State Bank of India, for that matter, means that the ownership stays with the government. And that as I have stated earlier, is the basic problem. For IDBI Bank to do well, it needs genuine privatisation with a private owner, with the government being a minority shareholder at best.

As I had mentioned in yesterday’s column, IDBI Bank is saddled with a huge amount of bad loans. And given this it is not surprising that the government owned financial institutions are not keen on picking up any stake in the bank.

The Times of India news-report cited at the beginning points out: “State-run entities are, however, not very keen on buying the government stake. “Given the distress in the banking sector, IDBI Bank may not be the best bet since its retail as set base is weak and it has legacy issues,” said a top official.”

IDBI Bank was a major lender to Kingfisher. It also lent to Deccan Chronicle Holdings, Bhushan Steel and Jaypee Associaties, companies which are in a financial mess.

Also, if the government follows any of these three methods to sell shares in IDBI Bank, as the majority shareholder it will have to continue to keep pumping money into the bank. In fact, the government holding in the bank has gone up “from 65.14% in July 2010 to 76.5% in December 2013 by total equity infusion amounting to Rs 5,300 crore”.

Any increase in holding will bring us back to square one.

In May 2014, the Committee to Review Governance of Boards of Banks in India (better known as the PJ Nayak Committee) had submitted a detailed report on reforming the public sector banks in India.

The Nayak committee estimated that between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.” The committee further said that: “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.”

The government on the other hand estimates that “the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore.” Of this amount it proposes to invest Rs 70,000 crore. It has not explained from where will it get the remaining Rs 1,10,000 crore.

These are not small amounts that we are talking about. The tendency is to look at the government ownership in many public sector enterprises as family silver and hence, be careful while selling it. But in case of many public sector banks that cannot be really said. If the government continues to own public sector banks in the years to come it will have to keep pumping money into them in order to keep them going.

Take a look at the accompanying table. I have picked up five banks which are of a similar size. There are two private sector banks (HDFC Bank and ICICI Bank) and three public sector banks (Bank of India, Punjab National Bank and Canara Bank) in the table. The profit of the private sector banks is many times the profit made by the public sector banks. Their bad loans are also significantly lower. In fact, HDFC Bank makes more money than Bank of India, Punjab National Bank and Canara Bank put together. So does ICICI Bank.

Name of the bank	Total assets (in Rs crore)	Net profit (in Rs crore)	Bad loans (Net NPAs to Net Advances)
HDFC Bank	5,90,503	10,215.92	0.20%
ICICI Bank	6,46,129	11,175.35	1.61%
Bank of India	6,18,698	1,709.00	3.36%
Punjab National Bank	6,03,334	3,062.00	3.55%
Canara Bank	5,48,001	2,703.00	2.65%

Source: Indian Banks’ Association. As on March 31, 2015
To conclude, people keep reminding me that comparing the performance of public sectors banks with private sector banks is like comparing apples and oranges. The public sector banks have social obligations which private sector banks don’t. This is true. Nevertheless, the question is does the government need to own 27 banks in order to fulfil its social obligations?

I think, the government can easily go about fulfilling social-sector obligations by owning the State Bank of India and 4-5 other banks which are strong in different regions of the country.

Finally, a government should not be running so many banks. There are so many other things that it should be concentrating on, but it doesn’t.

(The column originally appeared on The Daily Reckoning on Nov 5, 2015)

26 August, 2015

Indradhanush Framework: A Missed Opportunity For The Modi Government

Earlier this month, the ministry of finance recently came up with the seven step Indradhanush framework to transform the shape of the government owned public sector banks (PSBs). As the press release accompanying the announcement of the framework pointed out: “Indradhanush framework for transforming the public sector banks represents the most comprehensive reform effort undertaken since banking nationalisation in the year 1970. Our PSBs are now ready to compete and flourish in a fast-evolving financial services landscape.”

Given the marketing prowess of the Narendra Modi government, such a claim isn’t surprising. Nevertheless, the question is, does the framework address the basic issues at the heart of reforming the public sector banks.

In May 2014, the Committee to Review Governance of Boards of Banks in India (better known as the PJ Nayak Committee) had submitted a detailed report on reforming the public sector banks in India.

As the report submitted by the PJ Nayak committee pointed out: “Governance difficulties in public sector banks arise from several externally imposed constraints. These include dual regulation, by the Finance Ministry in addition to RBI; board constitution, wherein it is difficult to categorise any director as independent; significant and widening compensation differences with private sector banks, leading to the erosion of specialist skills; external vigilance enforcement though the CVC and CBI; and limited applicability of the RTI Act. A more level playing field with private sector banks is desirable.”

The committee had also proposed a solution to these problems. As it said: “If the Government stake in these banks were to reduce to less than 50 per cent, together with certain other executive measures taken, all these external constraints would disappear. This would be a beneficial trade-off for the Government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully. It is a fundamental irony that presently the Government disadvantages the very banks it has invested in.”

There is nothing in the Indradhanush framework which talks about either privatisation or the government bringing down its stake to lower levels in public sector banks. The Modi government like the previous Manmohan Singh government wants to continue owning 25 public sector banks. Also, by wanting to own 25 public sector banks, the government has gone totally against the “minimum government maximum governance” philosophy that Narendra Modi had espoused in the run-up to the Lok Sabha elections that happened last year.

The Nayak committee had also proposed that the government follow the Axis Bank model, where the government is an investor rather than the promoter. “The CEO is appointed by the bank’s board, and because the bank was licensed in the private sector, it sets its own employee compensation, ensures its own vigilance enforcement (rather than being under the jurisdiction of the Central Vigilance Commission), and is not subject to the Right to Information Act.”

The Nayak committee had also talked about the need to do away with the dual regulation of public sector banks by the ministry of finance as well as the Reserve Bank of India. This, the committee had said makes public sector banks uncompetitive. As the report of the committee had pointed out: “Any directions issued which are applicable to a subset of banks do damage to that subset, however laudable the objectives. Those banks not part of the subset are under no obligation to participate; if they do so the participation is voluntary, while for the subset it is coercive. Such discriminatory orders reduce the competitiveness of the subset. It is ironical that the Government seeks to make uncompetitive the very banks it has invested capital in.”

An excellent example of this is the lending carried out by public sector banks to many infrastructure companies over the last few years, where the private sector banks had stayed away from lending. A major part of the bad loans on the books of public sector banks come from lending to infrastructure companies.
As DN Prakash, President of Corporation Bank Officers’ Organisation and Vice-President All India Bank Officers’ Confederation, said in a press release: “A major part of NPAs of PSBs are in infrastructure, power and telecom sectors. When private sector banks had stayed away, PSBs had lent to these sectors as part of their commitment to economic growth and nation building. Today, they are blamed for the NPAs in these sectors.”

In order to rule out such problems the Nayak committee had recommended: “The Government should cease to issue any regulatory instructions applicable only to public sector banks, as dual regulation is discriminatory. RBI should be the sole regulator for banks, with regulations continuing to be uniformly applicable to all commercial banks.”

But the Indradhanush framework does nothing on this front. The idea of giving away control over public sector banks is a little too difficult for babus and politicians to digest. On this front, the Modi government is not very different from the previous governments.

Further, the public sector need a lot of money in the years to come, which the government as the major owner has to provide. But it cannot do so without ending in a big financial mess itself.

The Nayak committee between January 2014 and March 2018 “public sector banks would need Rs. 5.87 lakh crores of tier-I capital.” The committee further said that: “assuming that the Government puts in 60 per cent (though it will be challenging to raise the remaining 40 per cent from the capital markets), the Government would need to invest over Rs. 3.50 lakh crores.”

The government on the other hand estimates that “the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore.” Of this amount it proposes to invest Rs 70,000 crore. Where is this money going to come from is a question that the government hasn’t tried to answer.

Over and above this, the Indradhanush framework does not come up with any fresh thinking on the issue of bad loans that has been plaguing public sector banks. It lists out a series of things that the Reserve Bank of India has been doing for a while now. But as is well know these steps haven’t done much to stem the rot when it comes to burgeoning bad loans.

As Prakash of Corporation Bank puts it: “there is no resolve on part of the Government to recover NPAs from big corporates that constitute the major chunk of NPAs [non-performing assets] in the industry.”

There doesn’t seem to be any systematic solution in light to clean up the bad loans mess at public sector banks. The government had an opportunity to do this with the Indradhanush framework, which it has clearly missed. As Crisil Ratings pointed out in a brief research note, “A ‘surgical’ response to the challenge of NPAs by creating a ‘bad bank,’” could have been a step in the right direction.

The column originally appeared on Swarajya Mag on August 26, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)