Dena Bank chairman and managing director M V Nair will take over as CMD of Union Bank of India [Get Quote] on April 1, after its present CMD Cherian Varghese's term comes to an end.

This is one of the four top-level appointments in the public sector banking industry that the finance ministry cleared last month. Nair had joined Dena Bank [Get Quote] as executive director in 2004 and subsequently was made the chairman of the bank after the incumbent A K Khandelwal was made the chief of Bank of Baroda [Get Quote].

Prima facie, this is a progressive step taken by the government. After all, there have not been too many occasions when a public sector bank chief is identified two months before his predecessor hangs up his boots.

Normally, the successor's name is announced on the day the incumbent chairman retires. There have also been cases when the top slot remains vacant for a few days and even weeks before the new chairman is appointed. After all, there is an executive director to run the show.

There is also another departure from the past. Unlike a few other CEOs, Nair will have a long tenure of six years or so - by any yardstick, sufficient time to nurture and grow a banking entity.

Now, let's look at the other side of the story. This is the second successive CEO of Dena Bank who has not lasted more than a year. An executive director in Bank of Baroda, Khandelwal hopped across to the Dena headquarters (Dena and BoB are neighbours, located at Bandra Kurla Complex in Mumbai) and stayed put there for about a year and came back to BoB to head the bank when incumbent chief P S Shenoy retired.

Now, Nair is also leaving Dena for a bigger bank. So, the development and growth of Dena Bank is not important for the government, which seems to be more concerned about individual banker's career progression.

The state of affairs at Dena Bank, which is one of the relatively weaker PSU banks, may turn worse unless, of course, the government has some plans to merge it with another PSU bank.

This is just one of the ways of killing the public sector bank. There are other ways, too. Even the relatively stronger banks can be maimed by policy initiatives of the government.

For instance, last year it had allowed the management of PSU banks to pay performance-linked incentives to its competent employees who earn not even one-fourth of what their counterparts in private sector get in terms of salary and incentives.

Once the government allowed this, some of the banks like State Bank of India [Get Quote], Union Bank, Bank of Baroda and a few others went ahead and put in place incentive schemes for their performing employees.

Presumably, there were loopholes in these schemes and so the government has done a volte face and directed banks to rollback such schemes. By doing so, at one stroke, it has killed all the enthusiasm and competitive spirit that was being generated in the PSU banks.

A few banks that have to roll back the schemes are now shelving some of their plans in terms of computerisation and business process re-engineering, as their employees are not keen on participating in these programmes without incentives. There cannot be a better way of killing the spirit of the employees.

These are two recent instances. There are other conventional ways of creating un-level playing fields for the public sector banks.

For instance, they are under pressure to double their exposure to the agriculture sector in three years. Moreover, loans to agriculture must be at least 18 per cent of their 40 per cent priority sector lending commitments.

Then, they also need to lend to individuals under some of the government schemes like Prime Minister's Rogzar Yojana even though 30 per cent of such loans turn into sticky assets.

As if these strings are not enough to hamper the performance of the public sector banking industry, the government (in the form of finance ministry) has now started dictating terms in the matter of interest rates.

Even though the Reserve Bank of India has hiked its short-term policy rate by 25 basis points (one basis point is one hundredth of a percentage point), the finance ministry does not want the PSU banks to hike their lending rates to corporations since it will affect the growth prospects of the economy.

This was reiterated even this week at the finance minister's pre-Budget meeting with select bankers.

Without being able to hike their benchmark prime lending rate, these banks are now quietly raising their lending rates for new loans by increasing the spread between their PLR and the loan rate.

However, they cannot get the benefit of rising rates fully as they are not been able to reprice their existing loans unless the PLR is hiked. In a sense, the PSU banks are going the state-run oil companies' way of bearing the brunt of subsidy.

When the Sensex is ruling over the 10,000 mark, the government should start chalking out plans to encash its stake in PSU banks and make the most of the bull run. The money, generated through the sell off, can substantially bridge the fiscal deficit. And the banks will be free to compete.