Isn't it time these PSUs get more freedom? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Isn't it time these PSUs get more freedom? 

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In this issue:
» Indian IT at the forefront of job creation
» World Bank to fund skill development in India
» Does the RBI deserve a pat for the rise in rupee?
» Eurozone ratings slip again
» ...and more!

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Operating in a scenario where economic headwinds play spoilsport is bad enough. If the sector is banking you have additional roadblocks. Unwilling customers, tight liquidity and risk on asset quality are central to the business of banking. They get accentuated when the economy is in a downturn. But for a certain group of entities, whether the economic scene is good or bad does not matter. Making wrong business decisions, albeit unwillingly, is part of their mandate from the owners.

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.

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
If steep food and fuel inflation has given the impression of Mumbai being one of the most expensive cities to live in, think again. Major cities in other parts of the word have slid on the affordability index much faster. The cost of living index shows that living cost in Mumbai were nearly half of that in New York and Shanghai and a third of that in Zurich at the end of December 2011.

Data source: Economist

Is India's central bank like the duck in one of Warren Buffett's famous analogies? The pond in which the duck is swimming witnesses heavy rains. This causes both the level of the pond and the bird to rise. However, the bird is under the impression that its rising has been caused by its own paddling skills instead of the rains. Now, replace the duck with the RBI and the level of the pond with the rupee's appreciation of the past few weeks and a clear picture emerges. The rupee's appreciation is being touted as a victory for the RBI.

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.

The debt crisis certainly is far from over. After US got downgraded by S&P's last year for the first time in history, European countries are now facing the heat. Moody's has slashed debt ratings of Italy, Spain and Portugal. What is more, the ratings agency has issued warnings to France, Britain and Austria. The main issue for this downgrade seemingly is that European leaders are not doing much to reverse the downslide of their respective economies. Indeed, what was observed last year was policy paralysis gripping European leaders. This threatened the existence of the Euro. With some European leaders gunning for a rescue package and Germany favouring austerity measures, conditions in Europe only worsened. One big hurdle was overcome when Greece agreed to a tough austerity package recently. But Europe still has a long way to go caught that it is in a vicious circle. This is because the only way that debt can be cut down is to resort to austerity measures. But the latter will only choke growth in economies which are already reeling under recession making the repayment of debt that much more difficult.

Uncertainty in the global economic scenario has been hurting job creation for quite some time now. However, the Indian Information Technology (IT) industry seems to be at the forefront of job creation! As per the National Association of Software and Services Companies (NASSCOM), this industry would be adding around 2.3 lakh jobs in the current financial year (FY12). Not just that, even for the coming fiscal year FY13, it has already made job offers to 1 lakh fresh graduates. The job creation is not restricted to India alone. The Indian software industry has created more than 25,000 jobs in the US over the past several years. The industry has been growing at a fast clip for the past two decades. And the growth story is no more about body shopping or low value jobs. The industry seems to be moving up in the value chain at an aggressive pace. A growth estimation of 16% on the back of just 10% additional employees speaks volume in this regard. With more clients looking for greater cost efficiency and the Indian government's commitment for e-governance, the industry is set to keep its growth momentum in the future.

Skill development is essential for a growing country like India with a large, young population. Prime Minister Manmohan Singh says India will need about 260 m skilled people by 2018. This figure would need to increase to 340 m by 2022. But the problem is that there is a significant supply demand mismatch. And if this is not met, it could severely curtail India's growth. The National Skill Development Corp. (NSDC) has a mandate to train around 150 m people over the next 10 years. It currently has a corpus of Rs 150 bn, of which Rs 115 bn has already been committed. But, this money may not be enough. The World Bank plans to help India with this mission. The World Bank intends to fund various skill development initiatives in India. It may initially provide Rs 48 bn in support, and put in more money depending on the success of the initiative. Developing skills can truly help India become the next big economic superpower.

That Reserve Bank of India (RBI) Governor Dr Subbarao is not in praise of the government's functioning is no news. In a recent interview he once again criticized the government's policies on spending. According to him, the government should have a definite plan to control its debt and spending. Else, inflation control would be tough. At the same time, he has also blamed the extravagant policies for the country's decelerating economic growth.

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.

Impending risks in the Euro zone and a series of rating cuts seems to have has unnerved investors across Asian markets. Taking cues from peers in Asia, the indices in Indian stock markets opened lower and stayed close to the dotted line today. At the time of writing, the BSE Sensex was trading 23 points (0.1%) higher. Indices across other key Asian markets also closed flat to negative. Those in Europe have opened in the red.

04:55  Today's Investing Mantra
"The most important quality for an investor is temperament, not intellect...You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." - Warren Buffett
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3 Responses to "Isn't it time these PSUs get more freedom?"


Feb 14, 2012

It 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"!



Feb 14, 2012

PSU 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.



Feb 14, 2012

I 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 ??

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