PSBs need widespread equity ownership

THE Banking Companies (Acquisition & Transfer of Undertakings) Bill, 2000 tabled by the Finance Minister in Parliament recently recognises the fact that the Government does not have enough money to contribute to the increasing capital requirements of public sector banks (PSBs). With deposits held by PSBs rising by more than Rs.100,000 crores annually, the additional capital requirements in order to meet capital adequacy norms are substantial. With fiscal deficits incurred by the Union and State Governments exceeding 10 per cent annually, the situation is not expected to improve in the coming years.

However, what is surprising is that the Government, while wanting to reduce its holding to 33 per cent of the equity of PSBs, still wants to retain the public sector character of the industry. This is certainly confusing. The question that arises is: why stop at 33 per cent? By this logic, the Government can reduce its holding to even 1 per cent of the equity, and still retain the public sector character of the industry. One always imagined that the equity holding determined ownership in a company. Well one lives to learn.

Of course a few things will change. Once the Government gives up 51 per cent stake in a PSB, such a bank in the normal course should move out of the purview of the Central Vigilance Commission (CVC). Bankers will heave a sigh of relief. In fact, politicians and senior bureaucrats have often been unhappy with the present CVC, so no tears will be shed on that score.

However, what about the Banking Department in the Ministry of Finance? This department will of course continue, though it is basically superfluous once we have the Reserve Bank of India (RBI) - a reasonably knowledgeable central bank. The RBI can always follow up suitably with commercial banks regarding social sector or priority sector norms that have to be implemented. Similarly, there are various ministries that deal with the public sector units (PSUs) under their control. These ministries as well as the RBI are competent to co-ordinate with PSBs on how to deal with PSUs in general and sick PSUs in particular. We are at present witnessing PSBs shedding excess staff through a VRS package. What about encouraging the Union Government to voluntarily shed a few departments, including the Banking Department?

In fact, in order to improve the working of the sick banks, the Bill provides for supercession of the bank boards by the proposed Financial Reconstruction Authority (FRA). And who do you think will control the FRA? No prizes for guessing the answer - the bureaucracy.

The basic problem lies elsewhere, and this aspect has got insufficient attention of observers of the Indian economy. The Government does not have enough money to bring in fresh equity required by PSBs, but neither does it want to hand over the leading PSBs to private entities. In India private entities usually represent business families, which means that family-run businesses in future may control these banks with huge resources. The Government, it appears, was considering imposing a limit of one per cent on individual share holding in PSBs to safeguard them from takeovers once the Government became a minority shareholder. Such a condition has not been included in the Bill.

Banking is different in the sense that any buyer of a large bank will have access to large resources which a business family can control, albeit with the RBI acting as the regulator. In fact, with the kind of valuations that the major banks should realistically command (not the low prices at which some of them are quoted), most of these banks would be too expensive even for the wealthiest business families. Further, a few family controlled businesses with money are diversifying into all the new areas opening up, for example, telecom, power or insurance. Banking will be another industry which will be added to the list of diversification. The other option is to invite foreign banks. This is of course feasible, but may face political opposition. Also, given the unionism that most of these banks often face, foreign banks may find the task daunting.

What then what is the solution? In India we have a dearth of professionally run companies. Either we have family-controlled concerns where inherit the mantle, or we have government owned corporations where the last word is often with the Minister or the Secretary. Given the pivotal role played by PSBs in our country, the Government has an opportunity of transforming this industry into a modern industry by divesting its stake to the ordinary public, as well as institutions like mutual funds, foreign institutional investors, insurance companies, provident and pension funds and all India financial institutions. Further, well-run PSBs can also access the international capital markets through ADRs/GDRs. With freer international capital mobility, capital is no more a constraint for well run corporations. The Government should not interfere in the management of these divested banks and leave the RBI to regulate these banks. The top management of these banks should be appointed by a professional Board and be paid market related salaries. In fact, the Government could follow the examples of ICICI Bank and HDFC Bank in top management appointment policies.

The Government could adopt this approach even by retaining a 20 to 30 per cent stake. Once a professional and independent management team manages these banks, the shares of these banks will rise and the Government will be able to divest its remaining stake at a higher price. The end result will be a strong industry, run on professional lines and interested in serving its principal stakeholders - customers, employees and shareholders. However, for this to happen the strategy has to be clear and self-serving bureaucrats and politicians will have to take a back seat. In fact many bankers have also taken advantage of the way PSBs have been run over the years, while their more professional colleagues have been leaving these banks to work in a more conducive environment.

Let it also not be forgotten that PSBs have played a pioneering role in many areas, including spread of branch banking, spread of the savings habit in a large segment of the population, priority sector lending especially in the rural and small sector. However, it is time to move on. We now need a professionally run and technologically savvy industry that will be able to keep up with nimble new entrants and the foreign banks.

Banks today have to change direction as per market requirements. The share of the manufacturing sector is going down, while the share of the services sector is going up. Businesses in emerging sectors have to be financed, new techniques of deposit mobilisation have to be used and the retail segment targeted in a focussed manner. The PSBs have a great deal of expertise in certain areas, while there is paucity of talent in other areas. This means lateral entry of staff for certain jobs needs to be encouraged. Most of the staff lacks marketing expertise, and selling techniques have to be learned. The required changeover cannot be effected by retaining the public sector character of these banks.

To conclude, today the banking industry has a total deposit base exceeding Rs.900,000 crores. Around 80 per cent of these deposits are held with the PSBs. This huge quantum of funds cannot just be handed over to family run concerns, whose reputation for fair business dealings is not always exemplary. Commercial banks need to have widespread equity holding structures which should include institutional holdings, while being managed by a professional board. Only when we achieve such a shareholding pattern, will our PSBs be able to take advantage of a modern corporate structure where there is proper separation of ownership and management, that is, ownership by the investing public and management by professionals.

Abhijit Roy

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