Corporate transformation? This is what PSU banks need to do

The outcomes of the two-day "Gyan Sangam" in Pune, at which the prime minister, the finance minister and the governor of the Reserve Bank of India met public sector bankers, portend a significant and positive change in the Indian banking environment.

For many years, observers have voiced increasing concern about the state of what still is the largest segment of the banking system.

The tendency of government to influence lending activities, both directly and indirectly through such infamous devices as loan waivers, has been a persistent worry.

More recently, the huge build-up in non-performing assets, in large part attributable to massive exposures that banks took to infrastructure projects at the insistence of the government, is proving to be a hindrance to the banks' capacity to lend to their traditional business clientele.

The situation clearly calls for some drastic changes.

Immediately, more capital is needed to shore up fragile balance sheets.

From a more structural perspective, the entire ownership and governance framework needs to be rejigged.

The ability to get more capital from non-government sources is unquestionably related to governance reform.

Given this, the most welcome announcement from the event was the broad acceptance of the recommendations of the committee chaired by P J Nayak, which had suggested the creation of a holding company to exercise the government's ownership rights.

This entity, rather than the ministry, would then take on the responsibility of monitoring performance; it would potentially buffer bank managements from direct interference by the government.

Essentially, greater autonomy and independence are expected to create a stronger commercial orientation.

To reinforce this, banks are being asked to discover niche strengths and focus on them.

On its part, the government will step back in terms of its role in board appointments and, eventually, look at reducing its shareholding to less than 51 per cent.

The explicit commitment from the prime minister to put an end to interference may well be the high point of the meeting.

However, as positive as these developments are, it is best to view them through the lens of realism.

From the control perspective, over four decades have shown how tempting it is for the government to use the banking system for its political ends.

Good intentions to end this are all very well, but the resolve will be tested sooner or later.

A good signal to send would be to appoint apex board members of unquestionable merit and give them fixed terms.

Subsequently, board members of individual banks must also be seen to be free of government patronage.

From the managerial viewpoint, bringing in professionals from outside is necessary but not sufficient.

A smattering of outsiders will not be an effective instrument of change.

They will have to be inducted in large enough numbers and at a number of levels to have an impact.

The demographic transition that the banks will go through in terms of large-scale retirements over the next five years is an enormous opportunity to completely re-engineer organisational structures and processes. This opportunity must not be lost.

Finally, there is the question of weak and small banks.

Consolidation is being mentioned, though in somewhat hushed tones, but closure isn't.

Some difficult and politically challenging decisions lie ahead.