Background :-
- In the past few years, Public Sector Banks which have got predominant share of infrastructure financing have been sorely affected due to delay caused in approvals and land acquisition so, many large projects have stalled.
- It resulted in lower profitability for PSBs, mainly due to provisioning for the restructured projects as well as for gross non-performing assets (NPAs).
- High levels of non-performing assets in state-run banks have made it hard for the government to revive investment or accelerate growth.
So Government wants to revamp the PSBs ..in this light comes 'The Indradhanush framework' for transforming the PSBs representing the most comprehensive reform effort undertaken since banking nationalisation in the year 1970. Many points have been taken from recommendations of PJ Nayak Committee report ...although not whole-heartedly...!!!
ABCDEFG..thatz how it goes ...here is the plan !!!
- Appointments:
- The Government decided to separate the post of Chairman and Managing Director 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.
- The selection process for both these positions has been transparent and meritocratic.
- Board of Bureau:
- The BBB will be a body of eminent professionals and officials, which 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.
- Capitalisation:
- As of now,the PSBs are adequately capitalized and meeting all the Basel III and RBI norms.
- However, the GOI wants to adequately capitalize all the banks to keep a safe buffer over and above the minimum norms of Basel III.
- Infusion of 25,000 crore rupees of capital into debt-laden banks in this fiscal in phased manner. Out of this 20,000 crore rupees would be injected in August 2015.
- De-Stressing PSBs:
- Projects are increasingly stalled/stressed thus leading to NPA burden on banks.
- In a recent review, problems causing stress in the power, steel and road sectors were examined.
- Pending policy decisions to facilitate project implementation/operation would be taken up by respective Ministries.
- Flexibility in restructuring of existing loans wherever the Banks find
viability. - Six new Debt Recovery Tribunals (DRT) to speed up the recovery of bad loans of the banking sector
- To develop vibrant debt market for PSBs in order to reduce lending pressure on banks. Strengthen asset reconstruction of companies.
- Empowerment:
- 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.
- Banks will build robust Grievances Redressal Mechanism for customers as well as staff so that concerns of the affected are addressed effectively in time bound manner.
- The Government intends to provide greater flexibility in hiring manpower to Banks.
- Framework of Accountability:
- A new framework of Key Performance Indicators (KPIs) to be measured for performance of PSBs.
- Streamlining vigilance process for quick action for major frauds including connivance of staff.
- Governance Reforms:
- The process of governance reforms started with “Gyan Sangam” – a conclave of PSBs and FIs organized at the beginning of 2015 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.
- Next Gyan Sangam will be held between 14 to 16 Jan 2016 to discuss strategy with top level officials.
Now the question is ' Does
it offer something new or is the new design a revised version of the old?' Letz
have a look !!!
Firstly, the Appointments :-
- Indradhanush starts with ‘appointments’,
which have been pending—many PSBs have been functioning without heads for
months now, with three positions being confirmed only on August 14.
- The post of PSB chairman has been separated
from MD&CEO—it would be interesting to see if this alters the way
banks work.
- The former is a non-executive position at
head of the board while the latter is that of the executive head.
- The novelty is in keeping the posts open
for private sector executives, though there is little evidence that a public
sector banker is less capable than her private counterpart. There have been cases of failure on both
sides in the past. Two of the recently-appointed heads are from the
private sector. Such change, however, could affect the staff’s morale as
they might see a glass-ceiling at the top.
- On the other hand, getting a private
sector person to head a public sector unit is a challenge as PSBs have
well-defined ‘standard operating practices’ under which arbitrary decisions cannot be taken by the CEO as there is limited
flexibility. Hence, while the new head can add a breath of fresh air,
dealing with boards, senior executives, unions, non-officer staff,
compensation, etc. would mean an entirely different environment to work
in.
Secondly, the Banks Board Bureau :-
- The Bank Board Bureau is a new name for
the ‘appointments board’ and will have a different structure. But with the government
dominating the process of appointing members, this may not be very
different from the existing set up.
- One may not, however, not grudge the
government this power because it is just like how owner-driven companies
appoint their own boards and management.
Thirdly, the Capitalisation :-
- The issue of capitalisation of banks has
been handled well and can be construed to be an ongoing process as
previous budgets have been allocating funds for such capitalisation.
- A change from the stance taken last year
is that all banks will be provided capital and that the six big ones would
get priority as they would be funding large projects.
- An interesting aspect of this programme is
that there will be substantial disinvestment, up to 52%, in the next few
years to garner around Rs 80,000 crore— the aggregate recapitalisation
requirement is of Rs 1.8 lakh crore, of which only Rs 70,000 crore
will come from the government.
Fourthly, the Distressed Assets :-
- On the issue of distressed assets, various
measures have been taken, with the ministries concerned trying to address
the issue of stalled projects, especially where coal, power, land,
permits, etc, have held up investment.
- RBI has taken steps to address
NPAs, and hence this aspect of Indradhanush is a reiteration of the same. RBI has already spoken of moving
large loans to the debt market to de-stress banks, and this should be
pursued to strengthen the financial system.
Fifthly, the Empowerment :-
- The concept of empowerment is somewhat
new, assuring banks that the government will not interfere in the
commercial decisions taken by them. One may hope that, from now on,
banks will have freedom in fixing interest rates as
well, based on their own commercial judgement.
- The second part is in recruitment where they will be allowed to take in lateral
recruits. This may not really be new as they have
been doing so on ‘contract’ basis. This can be viewed as an extension of
what RBI has done under the new Governor where there has been recruitment
at lateral level on a permanent basis.
- However, it would be interesting to see how
pay is structured, given the foreseeable resistance from the unions and
the need to maintain equilibrium with existing staff.
- The present category of consultants has
been received well by the unions, which is heartening. But it could become
a challenge if existing senior officers take umbrage on grounds of
fairness. Therefore, this has to be done gradually, taking the existing
structure along.
Sixthly, the Framework for
performance :-
- The
framework for performance is not really new, but it does reveal
the parameters to be considered.
- The problem is that banks may work exclusively towards
achieving these goals as this will be linked to ESOPs for the top
management. Ideally, this should not be the approach because then the targets
become the sole end and banks will use all possible means to achieve
these.
- Besides,
such incentives must also be provided down the line, to all employees who
contribute to this effort.
- In terms of the parameters used, we should look at incremental
ratios as large banks will have both an advantage and disadvantage.
The advantage is that large banks can expand the denominator to get a
better ratio for NPAs while the disadvantage is that the profitability
ratios will be harder to improve given their size. It is hoped that the evaluation looks at incremental business rather than
aggregate.
Lastly, Governance :-
- The last part of Indradhanush, concerning governance, will
depend on how banks are allowed to function and the persons who influence
decision-making.
Moral of the Story :-
- The rainbow metaphor puts together succinctly the issues
confronting banks, just like we had the CAMELS approach earlier.
C -
Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk
- But the colours are not new and have been ‘works in
progress’ for the last five years and probably will remain so for some
more time before they cast their imprints on the system.
- The appointments, empowerment, bank board bureau,
governance and performance fallout have to be monitored closely to gauge
the difference made to bank functioning.
- It may be hoped that the same recipe will taste better as
concerted action is taken to make a difference in the way in which PSBs
function.