Loosen govertnment's grip to rid PSU banks of bad debt: SS Mundra

Significantly lowering government stake below 51 per cent will free state-owned lenders from the glare and harassment of government agencies like CVC and CBI, whose actions often delay decisions, RBI deputy governor SS Mundra said.

Also, this would give banks headroom to raise equity capital. For FY16, PSBs posted net loss of Rs 20,006 crore against Rs 30,869 crore while private banks posted net profit of Rs 39,672 crore, he told a banking reforms conclave organised by `Governance Now' in Mumbai.

The spike in non-performing assets was driven by the global financial crisis and the introduction of the public-private partnership model for infrastructure building that gave bank's the false notion of sovereign backing, Mundra noted

Banks were enthusiastic, rather major partners, in this newly opened field supported by accommodative fiscal and easy monetary policies. However, the process got plagued by weak governance, lax underwriting, high corporate leverage and several policy logjams, resulting in huge unpaid loans and a consequent spike in banks' NPAs, he told the India Banking Reforms Conclave 2016.

He said some of the events were external and hence, not in control of the bank management. But the important lesson is unambiguous - ''In absence of strong structural and governance reforms, consistency of the performance would always remain susceptible to such events.''

While such reforms in private sector banks have to be focused on misaligned incentives / compensations, he said the agenda for PSBs is much larger. However, the immediate and overriding priority is to complete the clean-up of the banks' balance sheets, which is underway.

The resultant provisioning needs coupled with meeting Basel III norms / migration to IFRS and to urge to capture due market share in growth funding would entail recapitalisation of most of these banks. Seeking this capital externally at this stage may be difficult as also value eroding for the majority owner, which is the government, he added.

Simultaneously the process has to continue to bestow greater ''governance autonomy'' to these banks.

''My sense is that the government ownership of these banks has resulted in crucial stability and resilience in trying times. Immediate roadmap should, therefore, be towards complete ''managerial autonomy''. If government remains the largest shareholder, not necessarily majority shareholder, it still serves the intended purpose. At the same time, it releases these banks from multi-institutional oversights and overlapping controls,'' Mundra stated.

Banks, he said, should have the autonomy to hire in order to be able to move towards competitive compensation, and move away from the ''collective bargaining''- among others.

While there could be a reasonable apprehension that such measures can adversely impact the objectives of inclusive growth being attempted through several national missions and schemes, Mundra said, the advent of several new institutions (as recently licensed by RBI), new processes, digital advancements and competition would ensure that these objectives are well supported.

Similarly, some of the reforms are driven by a global reform structure. These pertain to capital, liquidity and disclosure standards under the Basel III package. Some such other measures are TLAC, SIBs, Misconduct rules, etc. A few other measures are currently under discussion, such as, imposing risk weight on sovereign exposure and new standardised approach for credit and operational risk.

Some action regarding governance reform at banks has already been initiated, like the setting up of BBB, splitting the post of CMD into a non-executive chairman and a CEO, making the selection process more objective. However, he said, going forward, BBB should also cover selection of other board members.

At the same time, Mundra said continuity of top management is crucial, hence reasonably longer tenure for CEO (say 5 years) is necessary. Initial appointment could be for 3 years with certain set milestones, which if achieved, should earn automatic extension for next 2 years

Banks shold also ensure an orderly succession plan, which is crucial to ensure that there are no abrupt changes in key direction of the organisation.

Apart from these, banks should assess the whole gamut of credit risk, including fraud risks, KYC, customer service, compliance failures, mis-selling, technology gaps, ATM frauds, etc.

Reform measures, especially on governance, have achieved traction and attained a certain degree of maturity. The need now is to accelerate this process on the lines as covered in various preceding points, he added.