The ongoing stress in the banking sector and the dire state of the public sector banks (PSBs) has prompted a clamour for their privatisation in recent times. And now it's no longer just the outsiders, like former Chief Economic Adviser Arvind Subramanian, Godrej group chairman Adi Godrej or industry bodies Ficci and Assocham, raising this call.
The outgoing chairman of Bank of Baroda, Ravi Venkatesan, recently told Bloomberg that the government needs to ease its grip over the lenders or risk slowly killing off the sector. According to him, tight government control makes it hard to attract talent or take the tough decisions needed to address the bad debts weighing down the banks.
"India needs fewer, better capitalized, and better run public sector banks," Venkatesan said in a recent interview, adding, "But what is happening today is privatization by default rather than intent, as PSBs haemorrhage market share and capital."
As per RBI data, though the state-owned banks held around two-thirds of total deposits in the last fiscal, it was the private banks that had managed to mobilise more incremental deposits - nearly 60 per cent - than other bank groups. Similarly, a recent report by rating agency Icra sees private banks cornering around 80 per cent market share of the incremental loan growth between FY18 and FY20 as the mushrooming bad debt problem of the PSBs erodes their capital and constrains lending.
Making matters worse, according to the RBI, PSBs suffer from 85 per cent of total bank frauds. An RTI query last month revealed that the PSBs collectively took a hit of Rs 25,775 crore from bank frauds in the year ended March. Moreover, their weak balance sheets - 19 of the 21 PSBs posted a total net loss of over Rs 87,500 crore in the last fiscal and 11 of them are under the RBI's prompt corrective action framework - leaves them dependent on increasingly-fatter capital infusion from the government.
In the light of the above, Venkatesan believes that the PSBs need to consolidate if they are to avoid losing yet more market share to their private-sector peers, but this is better achieved after the banks get stronger rather than merging weak banks.
Some may argue that Venkatesan, a Harvard Business School alumnus, is an outsider himself. After all, he was hired from outside India's vast state-run banks' network in 2015, as part of Prime Minister Narendra Modi's attempts to overhaul the system. The former Microsoft Corp. India chairman said he had taken a pay cut to join Bank of Baroda and be part of "something big".
Under his watch, India's third-largest state-run lender has sought to differentiate itself. Its thrust on digitisation to save costs is a prime example. Significantly, it is performing better than its peers on several metrics. "This management has put Bank of Baroda right ahead of the public sector pack," Soumen Chatterjee, head of research at Guiness Securities Ltd, told Bloomberg, adding, "We are recommending clients buy the shares". The icing on the cake? Last week the bank reported a more than two-fold rise in quarterly profit to Rs 530 crore for Q1.
But despite all this, the fact remains that Bank of Baroda's investors haven't made money over the past three years - the second-worst performance among 10 lenders that form India's Bankex Index. "Investors are uncertain about whether Bank of Baroda's bad loans have indeed peaked, they're concerned the government will force mergers, and they're unsure if CEO Jayakumar will get another term," said Venkatesan, who's due to retire next month. Jayakumar, a former Citigroup Inc. managing director, also joined Bank of Baroda in 2015.
Incidentally, Venkatesan believes that the government needs to re-examine its current practice of selecting the top management of PSBs. At present, all senior appointments are made by a government-appointed panel but he recommends that the government should allow banks' boards to hire their own management and free them up to decide strategy.
According to him, once they have greater powers over management and decision making, PSBs should be able to tackle their bad loan issues more effectively and eventually tap the capital markets to strengthen their balance sheets. At that point, the government should be prepared to pare its stake in the lenders.
Venkatesan added that PSBs are already "systemically more accident prone" and their decline "will accelerate" unless the lenders reform. The ball is now in the government's court.
Edited By Sushmita Choudhury Agarwal