November 9: The Finance Minister announced more autonomy for public sector banks with much fanfare last week. A long-standing demand of public sector banks for autonomy has been partially accepted by the Finance Minister, at least on paper. But will banks get the real autonomy? Considering the `Navratna' example which promised much but means little down the line to nine public sector companies, there are many skeptics when it comes to the banking sector.

``Getting something is better than nothing. Our hands are tied now. For everything we have to run to the government or the Reserve bank,'' said a senior banker, adding that only a few banks will be able to get the maximum benefit out of these autonomy proposals. ``It will help certain banks which fulfill these criteria. But weak banks like Central Bank of India, Uco Bank and Indian Bank will have to wait for more years to get the benefits,'' said Rajendra H Kulkarni, Chief Manager (credit) of Bank of Maharashtra.

No doubt, autonomy alone is not sufficient to improve the performance.

``Disclosure and transparency will continue to remain major problems for public sector banks (PSBs) as long as they are susceptible to political interference. Bank balance sheets are not transparent especially with respect to NPA (non-performing assets) provisioning which has to be changed to gain investor confidence in a market oriented system,'' said an analyst with an investment bank, adding, ``give them the freedom to lend at their terms and their choice considering only commercial interests, then things will improve.''

PSBs have been clamouring for autonomy in decision making and management to compete with the private sector and to face the challenges posed by the market mechanism. The conditions put forward by the Finance Ministry for the partial autonomy include 8 per cent capital adequacy ratio, NPA level below nine per cent and owned funds of Rs 100 crore. However, the `autonomy' gracefully allowed by the Finance Ministry mainly include promotion from scale III to scale VI without reference to the government and no RBI permission for travel of chairman to overseas branches. A section of bankers feel these are only peripheral issues.

``Autonomy is welcome provided it is given without any pre-conditions. It will definitely improve efficiency and freedom of operations which are not so bad in PSBs as it is made out to be,'' says K K Nair, Director, Bank of Baroda. Will the partial autonomy lead to better performance? It is doubtful whether the autonomy proposal will reduce the burden of NPA - the major bane of PSBs. It is also doubtful whether many banks will be able to achieve the nine per cent NPA level stipulated by the government. The actual NPA level has been increasing year after year and with liberal lending norms, it may explode as happened in the Indian Bank case. The government will have to ensure that more freedom to banks boards and officials is not misused because some of the bank boards are filled with politicians and businessmen.

By the end of March 1997 about 25 out of the 27 public sector banks have achieved the minimum 8 per cent capital adequacy ratio. Three PSBs - Bank of Baroda, Corporation Bank and Bank of India - have together returned Rs 504.47 crore of their capital to the government and three PSBs have accessed the capital market during 1996-97. About 10 PSBs are going to be listed on the stock exchanges and they cannot afford to be under the clutches of mandarins at the Finance Ministry and their political bosses because they will be accountable to the shareholders also. As banks issue Global Depository Receipts (GDRs) more transparency and management efficiency is demanded.

On the profit track-record front, many banks are likely to fulfill the government conditions. As like last year, most of the banks have come out with good profits -- the total for PSBs amounts to Rs 3,000 crore -- in the current year and they are likely to fare well in the next year also.

When it comes to the government promises, the middle management in banks is likely to benefit from the partial autonomy as government reference can be avoided. ``No staff recruitment was going on for the last five to six years in the PSBs. In addition, there is a stipulation that only one per cent of the existing staff is to be recruited with reservation for specialised categories. Infusion of fresh talent by offering more salary will help these banks,'' said Kulkarni. But the experience of leading finance companies and new private sector banks shows that the recruitment of finance MBAs and specialists will not help much. ``If their experience is any indication, the autonomy in recruiting specialists wont help much. Now the NBFCs are throwing out people to reduce cost of operation,''said a top bank official.

``Now for recruitments upto the Deputy General Manager level, PSBs have to refer to the Finance Ministry. For creation of vaccancy also we have to refer to Finance Ministry,'' says Radhakrishnan Nair, Deputy General Manager of Corporation Bank. Even though banks have liberalised questions about loans and NPAs are being asked after 20 years.

While industrialists and businessman who dupe the banks go scot free only the junior level staff is being harassed for the management lapses. ``When we try to recover dues from our clients, they tell us `You go to the court' because it takes years to complete the legal procedures. Along with autonomy the legal system for recovery will also have to improve,'' Kulkarni says.

``We have to follow priority sector norms and the government departments are not following norms when they deal with PSBs,'' said a banker preferring anonymity.

The autonomy proposal is based on the D R Mehta Commission which studied the centralised recruitment system in PSBs and recommended that officers staff can be directly recruited from the campus without any clearance from the Reserve Bank of India or Finance Ministry. ``Autonomy and credit offtake are not related. Immunity from the accountability clause is important. If you strictly follow the current rule books, no decision can be taken by the officer because even a meagre violation of rule books is punishable. The rule books will have to be changed into guidelines,'' Nair said.

One factor which prompted the government to allow more autonomy seems to be the freedom being enjoyed by the private sector banks.

``In the private sector, we have the freedom to form our own opinion and forward it to higher authorities. While most decisions have to be approved at the board level, core groups consisting of board representatives and top officials can take emergency decisions. Unlike PSBs, we are not haunted by any fear psychosis while taking decisions,'' says Abraham Mathew, chief general manager, Industrial Credit branch, Federal Bank. The accountability of private banks is limited to following the norms. ``Only the selection of chief executive officer of a private bank is subject to the RBI approval. We are relatively free. Normally whatever proposal is put forward is approved by the RBI,'' says Siddharth Sitholey, Managing Director, Development Credit Bank.

All said and done, it is doubtful whether the government has the political will to provide more autonomy to the bank boards to close down loss-making branches. Bankers are unanimous in their opinion that efficiency will have to be improved in view of the integration of the financial system with the world economy and the prospects of India going for full convertibility on the capital account. PSBs will have to prepare for the `fittest- will- survive' regime. The ``partial autonomy'' is a small step of a long journey.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.