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Sunday, December 09, 2007

Worsening the PSU banking problem

Privatisation of PSU banks is difficult because 51% of MPs won't support the requisite amendment of the Bank Nationalisation Act. While progress is hard, it would be useful to atleast not make things worse. Further equity infusions into PSU banks by the Ministry of Finance make things worse. As an example, MOF is about to put Rs.16,742 crore into SBI. They didn't need to do that.

Going beyond new money going into PSU banks is the issue of dividend payouts. The average dividend payout for 2006-07 of non-financial firms was 18%. PSU banks paid out 14%. I would argue that far from putting more money into PSU banks, what MOF needs to do is get the payout ratio of PSU banks up. Simultaneously, given the poor HR, risk management and corporate governance of PSU banks, capital requirements for them need to be higher.

1 comment:

  1. Hi

    Government has 60% stake in State Bank of India. Capital is required to be infused to follow BASEL-II norms and which will be applicable to all banks.

    As mentioned by you 16,742 crores being put by MOF in SBI by way of right issue, I think there is nothing wrong in it because Government need to be in all sectors. Government cannot take chance to reduce stake. Financial sector is one of the pillar of economy.

    SBI has very very big network in India. Now is the time to capitalise on this and use that profit for development of other needed areas like textile. We need to make government corruption free by giving them taxes. Concept like lead india will surely bring change to government standard.

    It is not that goverment is infusing money in all public sector banks. Uco bank is planning to raise money from QIB and Bank of India is also planning to raise money from Overseas.

    This capitalist theory will bring to monopoly if not stopped by government. As reliance, birla, tata, indiabulls, vishal retail and other many more are coming into retail sector, currently it is looking good,currently they are giving discount too but when in future unorganised retail sector breaks down, they will start raising price. For example, Indiabulls retail bought pyramid retail but in this case pyramid retail earlier posted huge losses and now indiabulls will use this loss against it profit and as a result income of government reduces which is not good at all.

    Despite poor HR, risk management and corporate governance if you see Public sector banks give Net Profit of 18432 crore with sales of 178803 crore resulting into NPM of 10.31% while private sector banks give net profit of 6570 crore with sales of 62034 crore resulting into NPM of 10.59%.( Source Capital Market magazine Dec.31 2007 - jan 13 2008)

    This shows Good HR, good risk management and good governance not make them efficient to give more profit.

    I just want your reply. Nothing Else.

    Take Care
    Enjoy Life
    Prashant K. Vakharia


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