Union Budget 2015-16: A step closer to holding company structure for PSU banks

The Union government has finally moved a step closer to a holding-and-investment-company structure for public sector banks for better governance and raising future capital.

In Budget 2015-16 , Finance Minister Arun Jaitley has proposed setting up of an autonomous bank board bureau. The bureau will select heads of PSU banks and ask them to develop differentiated strategies and capital-raising plans through innovative financial methods  and instruments. This effectively means that the government would step back from managing the affairs of PSU banks. It would also reduce the burden of frequent capital infusion into PSU banks as it puts severe pressure on the fiscal position of the government.

The bankers have hailed the decision. "It will improve corporate governance of PSU banks and will bring transparency in appointing PSU chiefs and board members," says Indian Bank CMD and chief of Indian Banks Association, T.M. Bhasin.

Jaitley said this would be an interim step towards establishing a holding company for banks. But nevertheless, the setting up of a bureau is a step in the right direction.

PSU bank's biggest worry, however, is in the short-term, as they desperately need capital now.  The finance minister has made a paltry allocation of Rs 7,940 crore for capitalising PSU banks. In 2014-15, the government had given exactly the same amount, but it was based on the performance. Only nine banks got capital, while others were left out to fend for themselves.

"We have a problem at hand and it needs to be addressed urgently," says a PSU banker on the condition of anonymity. The government is expected to follow the same 'performance' approach to allocate capital to select banks.

Barring a few banks, such as SBI, Indian Bank and UCO bank, the remaining PSU banks are gasping for breath as their capital is fast eroding because of the slowdown in lending, deteriorating asset quality, high restructured assets and lower profitability. In addition, the pressure of Basel-III is building up fast and banks will require higher provision of capital.

The current estimate for PSU banks is Rs 5.5 lakh crore of tier-I capital in the next four years, out of which Rs 2.4 lakh crore will pure be equity. If they cannot arrange for the required capital banks will have no option, but to slowdown or halt their lending businesses. In a knee-jerk reaction, many banks have already started selling non-core assets to generate capital.

The other option is to reduce government stake to 51 per cent, but it is easier said than done. The equity valuation of PSU banks is dirt cheap in the market because of lower profitability and other challenges.