New Delhi
India has named private sector managers, including former senior executives at Microsoft and Citigroup, to oversee reforms of some of the state-controlled banks that dominate the country’s financial sector.
Ravi Venkatesan, a 51-year-old director of information technology group Infosys and former chairman of both Microsoft and Cummins in India, was named chairman of Bank of Baroda on Friday. Baroda’s new chief executive is P.S. Jayakumar, who previously worked at Citi and has been managing director of house-builder Value and Budget Housing Corp.
Unveiling details of how India’s state banks would be recapitalised and encouraged to improve their efficiency after years of rising bad loans, finance ministry officials also raised the possibility of bringing private sector bankers into the middle ranks of public sector banks hitherto run by bureaucrats.
“In the last few years, they [public sector banks] have faced a challenging situation,” Finance Minister Arun Jaitley said. “Even though a challenging situation did exist, there’s no cause for panic at all.”
State banks have dominated Indian finance since lenders were nationalised under Prime Minister Indira Gandhi in the 1960s, and they now control 70 per cent of assets. But they have in several cases been poorly managed and plagued by corruption.
Their bad and “restructured” loans (credits rolled over for borrowers) have together now reached 14 per cent of their assets after heavy exposure to the troubled sectors of steel, power, electricity distribution, roads, textiles and sugar.
After months of consultation with the banks led by Jayant Sinha, Jaitley’s deputy, the government of Narendra Modi, the prime minister, has announced a series of reforms and a scheme to recapitalise the state banks with Rs700 billion (Dh39.5 billion) over the next four years.
The money will be injected each year in tranches, with the aim of rewarding successful banks and forcing the others eventually to shrink their market share.
In the current financial year for example, 40 per cent of the Rs250 billion to be allocated will be shared among banks to ensure all reach the required capital adequacy ratio of 7.5 per cent of assets in accordance with Basel III norms; a further 40 per cent goes to the six biggest state banks vital to the economy, including State Bank of India and Bank of Baroda; and the remaining 20 per cent will be distributed based on each bank’s performance.
In a further sign of the government’s attempts to make state banks more competitive with private sector rivals, they will be henceforth be judged on “key performance indicators”, including quantitative targets such as return on equity and the proportion of fee-based income and subjective ones such as the level of skill development.
Most of the 27 state banks are listed, but the government has at present no plan to privatise them fully or even cut the government’s stake in any of them below half because it would require legislation difficult to push through parliament. Sinha has raised the idea of consolidation but says each bank’s board must decide its own strategy.
India Ratings & Research, part of Fitch, said in a report this month that the government’s planned injection of Rs700 billion for the state banks would probably fall short of what was needed. It said “public sector banks will need Rs930 billion, which is equivalent to an equity write-down of about 1.7 per cent of the banks’ risk weighted assets, and represents the loan haircut that banks may face to revive the financial viability of distressed accounts”.
— Financial Times
