No need to panic on public sector banks

No need to panic on public sector banks

Sustaining growth depends on bank morale.

Moody’s has downgraded scam-hit Punjab National Bank (PNB) to junk grade, following its ₹13,417-crore loss in the fourth quarter. This will make it tough for PNB to raise funds overseas. However, there is no cause for panic, given the government’s implicit and explicit support to every public sector bank (PSB). Other PSBs have also reported huge losses, a corollary to bad loans and their provisioning. The good news is that banks are using the bankruptcy code to clean up their books. The government has promised to move fast to infuse capital. PSBs, especially those under prompt and corrective action (PCA), can use the capital to build up their balance-sheets and start lending again. But broader systemic reforms are needed, ranging from developing the bond market to ring-fencing banks from political interference.

Today, four state-owned banks are headless, and nearly eight banks would have vacancies at the top soon. Missing leadership makes it tough for these banks to come out of the red. Appointments must be done swiftly. Any commercial decision involves both loss and gain. A banker found guilty of malfeasance deserves punishment, but the government must certainly give up the culture that views every loss-making decision with suspicion. Some structural remedies can minimise corruption. A holding company to hold the government equity in banks, with a board whose primary job is to appoint the boards of individual banks, would help. It can leverage its capital to infuse capital in the banks. It can serve to insulate the banks from politicians and bureaucrats who seek to influence lending decisions. It can also help put in place a remuneration structure that rewards performance of bankers.

Those who decide policy and take key decisions must be handsomely rewarded, linked to how their decisions pan out over time. It ought to be multi-tiered; the basic, fixed component small in relation to chunks linked to medium- and long-term performance, which must be truly generous, but subject to clawback. Banks must be empowered to lend to feed growth, not beaten up.