Isn't it time these PSUs get more freedom?
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Public sector banks in India have the best resources at their disposal. They have sufficient capital backing from the government to begin with. Sufficient penetration and scope to cater to a young, prospering under banked population is noteworthy. Above all they have adequate and affordable manpower with growing efficiency rate. When compared with their peers in the West, these entities seem to have business models that can hardly go wrong. Yet, one economic cycle after the other is spent getting their books in order. Reason being, they are government owned.
True unlike their Chinese peers, large Indian banks do not operate like the government's treasury. They do not fund asset bubbles or cater only to corporate heavyweights. Thanks to a strict regulator, their disclosure norms are also far better. However, their submission to the government's social commitments takes the wind out their sail. Every time the GDP growth looks good, the government ups its subsidies for the poor. Giving out cheap loans through the PSU banks is one of the most favoured tactics. One it does not hurt the fiscal deficit directly. Secondly, if the loans were to turn bad, the solution is easy. All the government needs to do is allow loan restructuring. That means the inevitable bad loans would turn into NPAs over a prolonged period. Needless, to say that the interest of minority shareholders in the bank is hurt. Every time the bank goes through the pain of loan write-offs, its net worth gets eroded. However, the bad business decision of offering cheap loans to ineligible borrowers is repeated again and again. The December 2011 results show a host of PSU banks carrying restructured loans and gross NPAs totaling 7 to 11% of their total loan book.
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Source: Company data, Mint |
Whether or not the PSU banks have efficient management is beside the point. Even the ones that do have little autonomy to use their skills. Having government ownership in few banks is not a bad idea. But it is high time these entities call for more freedom and proactive management.
Do you think the PSU banks in India enjoy less freedom than the other government owned entities? Share your comments with us or post your views on our Facebook page / Google+ page.
01:30 | Chart of the day | |
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Data source: Economist |
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In reality though, most of that must have been caused by the re-emergence of Foreign Institutional Investor (FII) inflows into the country we believe. Is rupee's appreciation likely to continue? We don't think so. The problems in the developed world are far from over. Thus, the hot money that has come in may go out just as fast. This could then cause the rupee to go down once more, probably settling at an even lower level than before. In view of this, the RBI has its task cut out. It can ill afford to get complacent. What makes matters worse is the fact that there is very little that even the RBI can do. Unless we make our economy resilient enough by boosting exports and reducing our fiscal deficit, we will continue to be at the mercy of hot money.
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As per Dr Subbarao, the government's unproductive policies are responsible for a huge quantum of money that has flown into the monetary system. This money is responsible for the increasing prices of asset classes which in turn is fuelling inflation. Unless the government rationalizes its spending through sensible policies, it is difficult to rein in inflation. The RBI meanwhile continues to counter allegations of anti growth policies.
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04:55 | Today's Investing Mantra |
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3 Responses to "Isn't it time these PSUs get more freedom?"
Nagaraja
Feb 14, 2012PSU banks live in dark ages, having to put up with dead and outmoded system, political pressure, giving loans to defaulters again and again after writing off their old loans in priority sectors and ruling party-connected advances.just like UPA, no drastic steps are taken to set right things, drifting from one crisis to another , thriving ad hoc solutions.If only some body digs up all the out standing cases with CBI against bank officials , lot more will be revealed about the NPAs.
kranthi
Feb 14, 2012I still circumspect on the ability of our PSU banks , after having more than 50 years presence in the economy still they have't reached the business scale and reach of avg Indian ...! We boast our PSU banks are strong the key is these set of bank are very conservative !!. Still not able to fund the atleast indian based big acquistion like Corus , Noveles ??
VIGNAANI
Feb 14, 2012It is definitely time that the PSU banks are given more freedom: at least, less back-seat driving by bureaucrats, who lack open-minded approach on any problem, shirk responsibilities. In fact politicians are to be blamed less than the bureaucrats for interference.
The PSU banks are one class, which stood competition from foreign entities -- in fact the Indian banks learnt the trade/tricks from those foreign entities but beat them in the own game in due course. The government, the political class, do nothing to encurage the culture of 'repayment' of loans - by giving an impression that the PSU bank loans are in a way a dole. The Indian banks have found ways of working a Governemnt-owned bank, fulfil the government's and Regulator's benchmarks, yet keep the bottom line in black. Let us not underestimate them because they have not reached global scale, referring to Corus, etc. We know the fate of "Global" banks such as "Citi bank", "the bank that never sleeps"!