Reduce govt stake in PSU banks to below 50%: RBI panel
14 May 2014
A committee-appointed by the Reserve Bank of India (RBI) has suggested a reduction in the government's stakes in state-controlled banks to levels below 50 per cent in order to improve governance and make them more competitive.
The panel also suggested transfer of government holdings in state-controlled lenders to a new bank investment company.
For private sector banks, on the other hand, the committee has recommended an increase in stake holding limit.
In its sweeping recommendations, the committee led by P J Nayak, former chairman of Axis Bank, wanted the RBI to be the sole regulator for the state-run banks.
The 111-page report, released on RBI's web site on Tuesday, raised concerns over the low productivity and profitability ratios of state-run banks vis-à-vis their private sector counterparts and the continued fall in their market share.
State-run banks have lost ''significant'' market share and their asset quality, which is already ''much weaker, has deteriorated further in some cases, the report points out.
The irrational policies followed by the government and bureaucratic red-tapes have also had a role in choaking of repayment of loans of PSU banks.
Bad loans of state-run lenders rose to a six-year high of 4.2 per cent as of 30 September 2013 from 3.4 per cent in March, RBI data shows.
''It is a fundamental irony that presently the government disadvantages the very banks it has invested in,'' the report said.
''The financial position of public-sector banks is fragile,'' the report said. It is ''unclear'' that the boards of most of these banks ''have the required sense of purpose, in terms their focus on business strategy and risk management, to steer the banks through their present difficult position.''
The worsening of asset quality has resulted in the shares of the state-run banks under-performing compared to private-sector lenders.
The CNX PSU Bank Index gained 53 per cent in the last five years, while the S&P BSE Bankex Index, which consists mainly private-sector lenders, has gained nearly 150 per cent.
''The central government is a good example of a bank shareholder that has suffered deeply negative returns over decades,'' the panel said. ''It is in the government's own interest to improve governance and management.''
According to the committee, a reduction in government ownership in PSU banks to below 50 per cent would be a ''beneficial trade-off'' as it ''would create the conditions for its banks to compete more successfully,'' even as the government remains the dominant shareholder in these banks.
State-controlled lenders, which meet more than 70 per cent of the country's credit needs, have been hamstrung for capital as the majority ownership by the government restricted banks' ability to raise capital. Their capacity to increase lending in turn depended on the government's capacity to inject cash into the banks.
Private sector banks, on the other hand, have the freedom to raise capital from the market by way of sale of shares, which increases their scope for increased lending.
A cash-strapped government has trimmed allocation for bank capitalisation for the current fiscal by 20 per cent to Rs11,200 crore ($1.8 billion) and any further increase in injection of funds into PSU banks is unlikely in the near future.
The committee's recommendations also aim at avoiding ''repeated claims'' on government for capital injections into state-controlled banks.
The committee made the recommendations after studying the working of 27 state-controlled lenders.
For private sector banks, the committee proposed the creation of a category of Authorized Bank Investors that would be able to own as much as a 20 per cent stake in a private-sector bank without regulatory approval.
ABIs would include entities such as pension funds, long-short hedge funds, exchange-traded funds and private-equity funds while leaving out proprietary funds, non-banking finance companies and insurance companies.
''Allowing larger block shareholders generally enhances governance,'' the committee said.
For banks identified as distressed by the RBI, the committee suggested permitting private equity funds, including sovereign wealth funds, to take controlling stake of as much as 40 per cent.
It also suggested introduction of proportionate voting rights to align investors' power in shareholder meetings with the size of their stake.
To end the menace of ''evergreening'' of assets by banks, the panel suggested that the banks should be authorised to claw back bonuses to executives and directors and also to cancel unvested stock options.
The Expert Committee headed by R J Nayak has been asked to examine, inter alia, the working of banks' boards, including whether adequate time is devoted to issues of strategy, growth, governance and risk management; to review central bank regulatory guidelines on bank ownership, ownership concentration and representation in the board; to analyse the representation on banks' boards to see whether the boards have the appropriate mix of capabilities and the necessary independence to govern the institution, and to investigate possible conflicts of interest in board representation, including among owner representatives and regulators.