A Sudarshan Chakra for PSU banks

Last week, the deputy governor of the Reserve Bank of India (RBI), Viral Acharya, borrowed a phrase from the Mahabharata to underline the urgency of tackling the financial crisis that has engulfed India’s public-sector banks (also known as PSU banks). At the end of his RK Talwar Memorial Lecture in Mumbai on September 7, Dr Acharya said: “The Indradhanush was a good plan, but to end the Indian story differently, we need soon a much more powerful plan — ‘ Sudarshan Chakra’ — aimed at swiftly, within months, if not weeks, for restoring public-sector bank health, in current ownership structure or otherwise.” The suggestion could not have come a day too soon.

In making that assertion, the RBI deputy governor raised two important issues. One, he made it clear that Indradhanush has not made much headway in terms of securing all the desired results for PSU banks. He probably paid the usual lip service to the idea that was announced with fanfare in August 2015, but there was an important “but” in the latter half of the same sentence that is by far the most powerful conjunction in English language. And that revealed his stance quite clearly and correctly, underlining the need for quick follow-up action in a different direction.

Two, his reference to the use of a Sudarshan Chakra has hinted at many options that the government must explore to tackle PSU banking mess. The use of that phrase has other implications as well. Columnist T CA Srinivasa-Raghavan has asked who will be the Shishupal, if a Sudarshan Chakrawere to be used. Remember that in the Mahabharata, Krishna used his strategic weapon, the Sudarshan Chakra, to behead Shishupal, the king of Chedi, after the latter had committed his 101st sin.

One may also wonder whether the Union government or the RBI will see itself as Krishna beheading Shishupal and what will constitute the 101st or indeed the past many sins for which a Sudarshan Chakra will have to be used. More importantly, what are those sins? Were they the acts of nationalising those banks or providing loans to unviable projects without following prudential norms or the government use of PSU banks for meeting its social goals or recapitalising them without any performance criteria?

The central question will be: Who is Shishupal? The banks, the government or somebody else? Clearly, India’s central bank continues to provide engaging analogies for the nation to debate. If the question of the one-eyed king in the land of the blind hogged the limelight a year or so ago, one can now be certain that the Sudarshan Chakra will be the next phrase that will be debated with as much passion.

But the Union government can hardly ignore the two issues that Dr Acharya has raised in his address. The Indradhanush package had four broad components: Setting up the Banks Board Bureau to oversee the governance of PSU banks and seek to distance their running from the political leadership in the government; infusion of fresh equity into these banks to improve their capital adequacy; induction of private sector talent to head these PSU banks and; setting up a new institutional mechanism to repair the balance sheets of those that are financially stressed.

Some progress has certainly been achieved on all these fronts in the last two years, although much more was expected. The Banks Board Bureau was soon established and it set the ball rolling for appointing a few private sector managers to head PSU banks, but that exercise stopped after a while and the experiment also did not yield the desired outcomes. The distancing of the bank managements from the political masters in North Block or South Block was an important goal, but no structure has as yet been put in place to formalise that relationship.

Fresh equity has been infused, but after showing virtually no regard for a performance-based criterion for such recapitalisation. As a result, the approach has remained the same for banks that needed to reduce their operations and banks that were relatively stronger and could have done with more capital. Legal formalities have also been strengthened with the enforcement of the Insolvency and Bankruptcy Code and the amendment to the RBI Act empowering the central bank to push for resolution of identified stressed assets of these banks. Already, some insolvency cases are being heard at the national company law tribunal and the resolution of stressed assets is expected to gain speed in the next couple of months.

But Dr Acharya is asking for more by way of at least creating a timetable for recapitalisation and divestment of government equity in PSU banks. No senior RBI representative in recent times has made public so categorically the urgency of quick action to resolve the PSU bank crisis as has been done by him. Yet it is clear that such an assessment is as much a comment on the intractability of the problem as on the government’s failure to address this issue with the kind of clarity, decisiveness and speed that the central bank believes is necessary.

The government’s track record in divesting its stakes in banks has so far been poor. In February 2016, the government announced its plan to privatise IDBI Bank, but till today the government is nowhere near implementing that decision. Complicating it further is the increased pressure on the government’s fiscal situation because of tax revenue uncertainty in the wake of the launch of the goods and services tax, the anticipated decline in non-tax revenue from RBI dividends, spectrum auction proceeds and disinvestment and the increasing demand for higher capital investment in development projects. From where will it, therefore, get the additional resources to meet Dr Acharya’s suggestion for quick recapitalisation currently estimated at around two per cent of India’s gross domestic product?

At the same time, the government can’t allow the problem to fester. Just as the government and the RBI got together to expedite the stressed asset resolution process, it is perhaps time for another round of government-RBI cooperation to tackle the recapitalisation issue. Why not persuade the PSU banks to sell their financially better-off subsidiaries and use those proceeds to recapitalise the promoter banks?

Simultaneously, the government could seriously explore the option of reducing its stake in these banks to 33 per cent. In 2000, the Atal Bihari Vajpayee government had announced its plan to reduce the minimum government shareholding in nationalised banks to 33 per cent, without changing their character and after ensuring that the fresh issue of shares is widely held by the people.

That proposal was abandoned in the face of stiff political opposition. Seventeen years later, the political climate has changed and the current government’s apprehensions over privatisation seems to be over, as is evident from its recent decision to privatise Air India. Why not announce a grand plan for privatising PSU banks and respond to Dr Acharya’s suggestion for a Sudarshan Chakra? The question of who can buy them can be handled later.