Inadequate capital support ( The hindu Financial Scene )

A seemingly routine injection of capital by the government in banks impinges on core issues of bank reform and governance.

The government has decided to infuse additional capital in nine public sector banks (PSBs) to an extent of Rs.6,990 crore. For the current fiscal, the amount budgeted (by the UPA government) for bolstering the capital of PSBs was Rs.11,000 crore. So, the actual amount that will be released is just over 50 per cent of the budgeted amount. That is a significant development for various reasons.

Obviously, it has major implications for the management of public finance. The government is cutting down on budgeted expenditure to meet the pre-set fiscal targets. The savings effected here — towards recapitalising PSBs — is not inconsiderable but who will bridge the gap in providing capital to these banks?

While such capital infusion has been common in previous years, the difference this time is that the government is injecting capital selectively. Only nine banks will get this instalment of government money. At the top of the table is State Bank of India (Rs.2,970 crore), Bank of Baroda (Rs.1,260 crore) and Punjab National Bank (Rs.870 crore). Other banks, which fall in this category, are Canara Bank (Rs.570 crore), Syndicate Bank (Rs.460 crore), Allahabad Bank (Rs.320 crore), Indian Bank (Rs.280 crore), Dena Bank (Rs.140 crore) and Andhra Bank (Rs.120 crore).

There are surprising omissions. For instance, Bank of India and Corporation Bank, which one thought would make it to any list of ‘performing’ banks, have been left out. It is not clear as to when, if at all, they will receive capital support from the government. Based on the stock market performance of their shares alone, these two banks should be in the list. The reasons for not including some banks are hazy. The government has said that the selection has been made on new improved parameters such as return on assets and on equity. These are evaluated over three years. It is questionable whether the period for analysing their performance should be so brief or due allowance should be given to their potential as well as past performance.

The idea is to ensure that some of the efficient PSBs will be adequately capitalised as they move towards international norms as prescribed under Basel III and, in the process, are better equipped to face competition. Whatever be the criteria for and the purpose of capital infusion, it would be desirable, in the interests of transparency, to disclose the methodology of selection in greater detail. There is no doubt at all that PSBs require additional capital whether that is obtained from the government or any other source. The stock market route ought to be a viable option for most PSBs, and has, in fact, been recommended by the government and outside experts. However, there is one major stumbling block in selecting this route.

As of now, the political consensus is that the government’s stake should not be allowed to fall below 52 per cent. This restriction arises from the mindset that on no account the government’s stake should fall below 50 per cent of the paid-up capital — a cushion of 2-3 per cent is necessary to thwart a potential takeover by an adventurer. In most PSBs, the government stake is well above this limit — in a few banks, it is even as high as above 80 per cent. In some, it is above 70 per cent and only in a handful is the government shareholding close to the floor of 52 per cent. This suggests that by a process of disinvestment by the government or through an offer for additional shares, some PSBs can beef up their capital. However, as experiences of the broader disinvestment programme involving central government PSUs would show, it is never easy to sell shares by or on behalf of the government. The question of getting a ‘correct’ price would always weigh with the decision makers.

Reconciling public sector character of these banks with the compulsions of the capital market has engaged several expert groups over the years. The most recent of these — the Nayak Committee, which dealt with a range of issues connected with banking reform, has suggested the setting up of a Bank Investment Committee (BIC) under the Companies Act as a core investment committee to which the government’s shares will be vested. The upshot will be that all government banks will become subsidiaries of the BIC and get the important advantage of being able to manage their affairs free from government interference. This will be a big bang reform, which the government may hesitate to embrace at this juncture.