Public sector banks -- Can the country bank on them?

N. S. Vageesh

THERE were two key developments this week that hold important implications for the future of public sector banks.

The first pertains to the Government keeping the divestment option open to bring down its stake in public sector banks below 51 per cent. This will come about through a clause in the proposed Bill which will allow free transferability of shares held by the Government. Hitherto, the reduction in the percentage of government holdings came about only through banks accessing the capital market for funds.

The current investor apathy towards banking stocks, especially from the public sector bank stable, may have played an important role in the Centre examining the divestment option. Although public issues by banks are likely to sail through at the primary market (through some gentle arm twisting of borrowers and peers in the banking industry), it is their subsequent performance on listing which betrays the actual investor interest.

Even after such capital offers, some banks are not really in a comfortable situation as far as capital adequacy requirements are concerned, and would have to come for a second round of funding sooner than later. Nor has the reduction in government stake made a significant difference to the operational performance of these banks. Given the Government's own reluctance to pump in more money, it, probably, is looking at the third option of allowing strategic investors to pick up a part of its stake.

It could give up as much 67 per cent stake in a number of nationalised banks considering that it is committed to a minimum holding of 33 per cent in the proposed Bill. Even in listed nationalised banks, where the Government's stake currently ranges between 65-75 per cent, it could give up the equivalent of 33 per cent stake to encourage strategic investments. Such a move could make the banks more attractive for potential investors and also pave the way for eventual privatisation and better portfolio investor interest. The clause to allow free transferability of shares would facilitate such an objective.

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CVC net

The Central Vigilance Commissioner, Mr N. Vittal's statement that banks would be out of his jurisdiction as soon as the government stake falls below 51 per cent, is likely to be widely welcomed by the rank and file in the banking industry. The spectre of Vigilance proceedings have demoralised the public banks enormously over the last few years.

Nothing upsets bank officers as much as vigilance officers who sit in judgment over the credit decisions the former made, years ago. Even internal procedures in bank, which insist on staff accountability being fixed for any loss can at the best of times only demonstrate the insight of hindsight!

It is inherent in commercial transactions especially in the banking business that decisions, made in good faith can go wrong sometimes. Vigilance enquiries have often failed to grasp this point and degenerated into a kind of witch hunt. There are instances of cases being foisted even just prior to the retirement of the officer concerned, and also of cases continuing without an early denouement.

The ``fear psychosis'' among bank officers, although not heard about now as much as a year or two ago, remains. It just takes a different form -- as in delaying decisions or passing the buck to the next higher authority.

Bank officers, for instance, have been known to request the borrower to apply for a higher amount, so that they would not have to sanction the required amount. The `cross' would be borne by someone sitting higher up. Or they ply the borrower with so many queries and demands to make the loan absolutely safe, that it delays the credit delivery process inordinately.

Even the lack of a vibrant term, `money market', is traced to the inability of public bank officers to take positions based on their view of the market at any point of time. With interest rates proving volatile, there is always the possibility of making a wrong call and inviting vigilance enquiries. Similarly, trading in derivative instruments will also be feeble unless banks are out of the CVC net.

Mr Vittal's statement is also to the effect that banks can voluntarily come under the CVC net if they want to. They would be happy to get out of his clutches at the first opportunity.

Pic.: The public sector bank employees' agitation on November 15... Nothing upsets bank officers as much as vigilance officers who sit in judgment over the credit decisions the former made years ago.