PSBs- Oxygen of Rs. 70 K Crores : Serious Flaw in Banking Structure |
| Indian Economy in last 68 years has seen substantial growth post independence. The Economy got boost in 1991 by way of liberalization. This growth was further fuelled by various political and economical steps taken by Government India under different political parties. |
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| Public Sector Banks have played very crucial role in this growth . The trust and patience displayed by banking authorities in Indian Entrepreneurs has been remarkable. Government has continuously supported PSBs by way of infusion of capital from time to time. Without this support, Indian banking would not have been in such a healthy position. |
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| 1. Subsidiary Companies: Most of the PSBs are having one or more wholly owned subsidiaries in the field of advisory services, ARCs, housing finance, Insurance, Asset Management, Factoring, Broking etc. Some of the Banks are having key share in rating agencies too. Most of the Rating agencies and Asset Reconstruction Companies are owned by the Banks only. These subsidiaries are surviving on mostly fees from the assignments created by parent company. In my view this is serious issue of conflict of interest. |
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| Let me explain the issue: ‘A’ Bank who is a major Bank of the country has advisory firm engaged in capital market, Restructuring, Debt Syndication, CDR, TEV Study etc. This advisory firm will take the assignment for loan syndication. Generally assignments are given out of pressure. Being a subsidiary company parent bank will be soft in lending to the client sourced by it. In my view this activity falls into conflict of interest and probability of wrong decision in lending becomes very high. Similarly, when an account gets stressed and need restructuring, parent bank will give this assignment to this advisory firm. |
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| Again this firm will charge heftily to liaise with parent bank on behalf of the client. Again this is conflict of interest and right decision may severely get affected as there is conflict of interest. In the greed of earning fees, the chance of mistake becomes very high. Other side, if some one does not give the assignment to this subsidiary, parent bank may not appreciate and take wrong decision . In both the cases parent bank and client are sufferer. Same principle applies for Insurance and Mutual Fund activities. Further there is frequent transfers from parent to subsidiary and vice versa. |
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| 2. Investment in ARCs and Rating Agencies: Most of the PSBs are shareholders/promoters of Asset Reconstruction companies and Rating agencies. As it is well known that ARCs play major role in case of stressed accounts, the conflict of interest is quite apparent. If the stressed accounts are being assigned to an ARC, irrespective to whatever level of transparency, the role of a company promoted by a Bank is highly objectionable. Same bank lending and post NPA, being assigned to own company can not be justified and the chances of injustice to either Bank or the Client can not be ruled out. |
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| Suggestions: To make the Banks sustainable and stronger for long time, GOI should look into following suggestions: |
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| 1. |
PSBs should not be allowed to enter into various different activities mainly those of conflicting interest i.e. Capital Advisory Services, Syndication Services, Restructuring Advisory, Insurance , ARCs and Rating Agencies. Those already into these activities should be instructed to scrap these business in near future; |
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| 2. |
Fund utilisation by Banks should be monitored by a separate committee of experts, other than RBI, regularly; |
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| 3. |
Transfer from parent bank to subsidiary and vice versa should be immediately stopped as this makes the institution vulnerable to losses; |
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| 4. |
Till the PSBs are out of these subsidiaries, Same Bank should not do any business with subsidiaries to bring in better decisions and transparency. |
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Subsidiary Companies should be immediately headed by GOI nominees and designated team. |
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| 6. |
Any business generated by Subsidiaries by way of using the office of parent bank or pressure should be treated as misuse of office. |
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