Saturday, July 28, 2007

Are India's public sector banks ready for 2009?

The RBI is set to liberalise norms for foreign bank entry into India in 2009. To what extent it will do so will depend partly on how far it judges Indian banks to be ready for foreign competition. Are they?

I doubt very much. The problem is not, as many people believe, the size of Indian banks relative to their international peers. And the solution is not consolidation among public sector banks (PSBs). Nobody knows precisely what is the right size today for Indian banks, so to urge consolidation on grounds of scale economies is so much loose talk.

The main problem is the sheer lack of the necessary skills among PSBs. These banks have an ageing workforce. There has been virtually no recruitment, much less recruitment of officers, for years. Some recruitment is taking place now but it is just not enough for 2009. In other words, HRD is the no. 1 issue and should be the no.1 priority at PSBs, as I argue in my ET column, PSBs must get cracking on HRD.

Both the finance ministry and the top management of banks are responsible for the sorry state of affairs. The ministry because it simply does not recognise that you need continuity in management at the top. Top executives, including chairmen, are routinely moved from one bank to another in one or two years' time. The Board has no role in the matter and is in no position to hold people accountable.

The composition of the board itself leaves much to be desired. It includes politicians, which is not a problem in itself, except that the political appointees are not always the smarter lot amongst politicians. At Punjab and Sind Bank, we had the bizarre spectacle of the Chairman going public with his complaint about the behaviour of the political appointees- they were not letting him get on with his job. The sitting fee for directors is a paltry Rs 5000- is this because they are expected to make money in other ways? A top bank like SBI should have a galaxy of people of national and international repute. But who will want to join unless they are decently compensated?

Bank management has shown complete indifference to the HRD challenge. There are instances where unions have pushed for new recruits but chairmen are not willing to oblige. More people means more costs, possible more problems with insiders. So chairmen are happy to milk the existing bank for what is worth. This has produced results. The same workforce or a downsized one has produced more and more revenues and profits. Bank chairmen can thus claim to have produced results- and now they can even collect their performance- linked incentives. As for the future, who cares?

I am among those who argued over a decade ago that PSBs were capable of turning around if given clear commerical objectives and subjected to stock market discipline. I have been proved right. But I could not have imagined that PSBs would simply rest on their laurels.

When the RBI came out with its plan a few years ago for a gradual opening up to foreign banks, it was on the presumption that PSBs would have got their acts together by 2009. They have failed to do so.

As if this is not bad enough, the government is not willing to let PSBs raised badly needed capital as this would require government ownership to fall below 51%- and this is something the Left will not allow.

So what are the prospects? Well, the possibilities are as follows:

1. The government and the RBI realise that further opening up would undermine PSBs and continues to go slow after 2009.

2. The government and the banks, by some miracle, manage to get PSBs in better shape by 2009.

3. The PSBs are not ready and foreign banks start marching in. This would cause their value to be eroded and the government, as owner, would be the loser.

If (1) and (2) are not feasible, then it is best that the government readies some of the PSBs for sale and maximises the value it realises on its shareholding. That is at least better than (3)

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