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Indradhanush Strategy to Revamp PSU Banks

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Indradhanush Strategy to Revamp PSU Banks

shape Introduction

Public-Sector Banks (PSBs) play a vital role in India’s economy. But in the last few years, PSBs are having lower profitability for PSBs, mainly because of the provisioning for the restructured projects as well as because of gross NPAs. To revive the fortunes of public sector banks , the government unveiled a seven-point plan. Encompassing(surrounding) Rs. 20,000 crore immediate fund infusion, the creation of a single holding company and minimizing political interference.

The government has introduced a strategy Indradhanush, which also includes setting up of a Bank Board Bureau (BBB) for broad-level appointments and a performance – based monitoring mechanism. The strategy, Indradhanush, focuses on systemic changes in state-run lenders, including a fresh look at hiring, a comprehensive plan to de-stress bloated lenders, capital infusion, accountability incentives with higher rewards including Stock Options and cleaning up governance.

shape Elements

The 7 Elements in the Indradhanush Strategy is listed below.

    A. Appointments

    B. Bank of Board Bureau

    C. Capitalization

    D. De-Stressing Public Sector Banks

    E. Empowerment

    F. Framework of accountability

    G. Governance ReformsNow

A. Appointments:

  • The Government decided to separate the post of Chairman and Managing Director by prescribing that in the subsequent vacancies to be filled up the CEO will get the designation of MD & CEO and there would be another person who would be appointed as non – Executive Chairman of PSBs.

  • This approach is based on global best practices and as per the guidelines in the Companies Act to ensure appropriate checks and balances.

  • Private sector candidates were also allowed to apply for the position of MD & CEO of the five top banks i.e. Punjab National Bank, Bank of Baroda, Bank of India, IDBI Bank and Canara Bank.

B. Bank of Board Bureau:

  • The BBB will be a body of eminent professionals and officials, which will replace the Appointments Board for appointment of Whole-time Directors as well as non-Executive Chairman of PSBs.

  • They will also constantly engage with the Board of Directors of all the PSBs to formulate appropriate strategies for their growth and development.

  • The BBB will comprise of a Chairman and six more members of which three will be officials and three experts (of which two would necessarily be from the banking sector).

C. Capitalization:

  • As of now, the PSBs are adequately capitalized and meeting all the Basel III and RBI norms.

  • However, the Government of India wants to adequately capitalize all the banks to keep a safe buffer over and above the minimum norms of Basel III.

  • As per the official, the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore.

  • This estimate is based on the credit growth rate of 12% for the current year and 12 to 15% for the next three years depending on the size of the bank and their growth ability.

  • Out of the total requirement, the Government of India proposes to make available Rs.70,000 crores out of budgetary allocations for four years as per the figures given below.

1. Financial Year 2015 – 16 Rs. 25,000 crs
2. Financial Year 2016 – 17 Rs. 25,000 crs
3. Financial Year 2017 – 18 Rs. 10,000 crs
4. Financial Year 2018 – 19 Rs. 10,000 crs
Total Rs. 70,000 crs
  • Improved valuations coupled with value unlocking from non-core assets as well as improvements in capital productivity, will enable PSBs to raise the remaining Rs. 1,10,000 crores from the market.

D. De-Stressing Public Sector Banks:

Besides the recovery efforts under the DRT & SARFASI mechanism the following additional steps have been taken to address the issue of NPAs

a. RBI released guidelines in 2014 for Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy”suggesting various steps for quicker recognition and resolution of stressed assets:

  • Creation of a Central Repository of Information on Large Credits (CRILC) by RBI to collect, store, and disseminate credit data to banks oncredit exposures of Rs. 5 crores and above,

  • Formation of Joint Lenders Forum (JLF), Corrective Action Plan (CAP), and sale of assets.

b. Flexible Structuring of Loan Term Project Loans to Infrastructure and Core Industries.

c. Wilful Default/Non-Cooperative Borrowers :

  • RBI came out with new category of borrower called Non-Cooperative borrower.

  • A non-cooperative borrower is a borrower who does not provide information on its finances to the banks. Banks will have to do higher provisioning if they give a fresh loan to such a borrower.

  • Fresh exposure to a borrower reported as non-cooperative will necessitate higher provisioning.

d. Asset Reconstruction Companies :

RBI has tightened the norms for ARCs

e. Establishment of six New DRTs :

Government has decided to establish six new Debt Recovery Tribunals (DRT) (at Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri, Hyderabad) to speed up the recovery of bad loans of the banking sector.

E. Empowerment:

  • The Government issued a circular that there will be no interference from Government and Banks are encouraged to take their decision independently keeping the commercial interest of the organisation in mind.

  • With autonomy comes accountability, accordingly Banks have been asked to build robust Grievances Redressal Mechanism for customers as well as staff.

  • The Government is committed to provide required professiona to the Board.

F. Framework of Accountability:

  • The present system for the measurement of bank’s performance was a system called SoI – Statement of Intent.

  • There were two changes that is being done in SoI, which are as follows:

  • A new framework of Key Performance Indicators (KPIs)to be measured for performance of PSBs is being announced.

  • It is divided into four sections totaling up to 100 marks.

  • 25 marks each are allotted to indicators relating to efficiency of capital use and diversification of business/processesand 15 marks each are allotted for specific indicators under the category of NPA management and financial inclusion.

  • The total marks to be allotted for quantifiable, measurable criteria is 80.

  • The remaining 20 marks are reserved for measurement of qualitative criteria which includes strategic initiativestaken to improve asset quality, efforts made to conserve capital, HR initiatives and improvement in external credit rating.

G. Empowerment:

  • The process of governance reforms started with Gyan Sangam – a conclave of PSBs and FIs organized in Pune.

  • There was focus group discussion on six different topics which resulted in specific decisions on optimizing capital, digitizing processes, strengthening risk management, improving managerial performance and financial inclusion.

  • The decision to set up a Bank Board Bureau which was subsequently announced in the Budget Speech of Hon’ble Finance Minister, came out of the recommendations of Gyan Sangam.

  • The Gyan Sangam recommendations included strengthening of risk management practices.

  • Each bank agreed to nominate a senior officer as Chief Risk Officer of the bank.

  • A special training programme for Chief Risk Officers was recently organized by Centre for Advanced Financial Research and Learning (CAFRAL).

  • The Government has been constantly engaging with the Banks through review meeting and sessions for strategic reviews etc.

  • The focus is on improving HR management practices and removing barriers so that the Banks can share and work together on common resources. Various steps have been taken to empower Bank’s Boards.