RBI Issued a New Set of Recommendations on Ownership in the Banking Sector.
Bihar assembly election results and those of recent polls in a few states indicated that the people of India are supporting the various reforms and development agenda of the BJP government. The election took place just after some major announcements were made for the agriculture and labor sentiments that the government must continue with the reform process.
The Reserve bank of India (RBI) has just issued a consultative paper with a new set of recommendations on ownership in the banking sector. This suggestion can affect long-term capital from new sources.
On reforms in the financial sector, and more specifically in public sector banks (PSBs), it is important to look at some of the performance parameters relating to them. After consolidation, we now have 12 public sector banks.
Over the last three years, the Government of India has poured in approximately Rs 3 lakh crore for recapitalization of the Public Sector Banks. In 2014, RBI had set up a committee under the chairmanship of Dr. PJ Nayak to look into the state of the PSBs and to make recommendations on their future. If the governance of these banks continues as at present, it will impede fiscal consolidation, affect fiscal stability, and eventually impinge on their solvency.
Consequently, the committee recommended two options to the government: either to privatize these banks and allow their future solvency to be subject to market competition, including through mergers; or to design a radically new governance structure that can better ensure their ability to compete successfully, so that repeated claims for capital support from the government, unconnected with market returns, can be avoided.
As banking is a strategic sector, the government should retain a controlling stake in the top four public sector banks. However, for the remaining eight public sector banks which are much smaller but fiscally risky, the government should consider reducing its ownership and bringing in another strong strategic owner.
The key issues in executing this will be to ensure the security of funds for existing depositors, protection of pension of employees, and recovery of bad assets. To address these issues, the strategic buyer should be required to put in substantial capital to maintain a high level of capital adequacy and liquidity after accounting for asset write-offs. The strategic buyer should be allowed to buy 51-75 percent stake in such banks through a primary infusion. The government should retain some stake along with the public shareholders, who could benefit by re-rating the stock due to future efficiencies.
Finally, since the strategic buyer will be required to contribute significant capital immediately and on an ongoing basis, anyone with a deep pocket in India or a strong global financial services player could be allowed to participate in the process, of course with the fit-and-proper check.