FROM OUR RESEARCH BUREAU. Reforms to improve governance in PSBs

Public sector banks were expecting large capital infusion from the Government to help them meet Basel III requirements. Instead, the Finance Minister has set the ball rolling on reforms that can materially improve the governance in public sector banks. The proposal to set up a Bank Board Bureau has been aimed at ushering in improved governance of public sector banks.

The Centre has been meeting the capital needs of state-owned banks in the past and has infused about ₹58,600 crore in the last four years (2011-14). After infusing ₹14,000 crore in 2013-14, the government has been tight-fisted in 2014-15. The Centre infused ₹6,990 crore into these banks in 2014-15. Along with reducing the amount it infuses, the Government has adopted a new criterion for selecting banks. Only banks that are more efficient would be rewarded with additional capital — ones that have delivered above average returns in the last three years.

Considering that public sector banks need about ₹2.4 lakh crore over the next four years, the meagre ₹9,000- crore-odd amount, earmarked in the current Budget, is a clear indication that the Centre will restrict infusion to better performing banks.

While the Centre’s move to nudge inefficient banks to put their house in order is a step in the right direction, this would not be possible unless they can materially improve their efficiency. To facilitate this, some of the constraints, such as dual regulation, and board constitution, need to be addressed. The Government’s intention to reduce its stake to 52 per cent is welcome. But to kindle investor interest, there needs to be a change in the governance structure. The constitution of an independent Bank Boards Bureau will bring in independent selection process for top bank officials and hence ensure accountability for the performance.

This move will impact all PSU banks positively. However, in the near term, banks that have very low capital ratios and weak asset quality, will find it difficult to grow and meet their Basel III requirement. Central Bank, United Bank, IOB, Union Bank, Bank of India and Vijaya Bank are some of the banks that have Tier I capital of less than 8 per cent and have not received capital infusion in 2014-15. These banks have a return on asset of less than 0.4 per cent and may not make the cut in 2015-16 as well.