INDRADHANUSH

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INDRADHANUSH

A Plan for Revamp of Public Sector Banks

-CREDIT CRUNCHERS-

volution of The Indian Banking Sector has been accompanied

by the strong balance sheets, variable asset quality, reliance on
technologies for handling systems and the new business
models. The Public Sector Banks are at the core of the financial system.
They account for 70% of the industry and have always been criticised for
their inefficiency, corruption and poor credit management.
They do carry the burden of governments developmental activities from
rural lendings to infrastructural projects and now to the Jan Dhan Yojana.
A financial inclusion programme, Jan Dhan Yojana has led to initiation
of many zero balance accounts, which instead of
creating assets, have increased the liabilities of banks.
Currently, the high leverages by asset-heavy sectors,
the politically connected wilful defaulters, increasing
stress and declining bottom-line best suits the timeline
of Indian PSBs. These have necessitated the need of
revitalizing them.

The constraints, PSBs undergo the

dual regulations as they are being
regulated by both the Finance
Ministry and by RBI.
The PSBs might continue to
worsen unless there is an effective
revamp of their governance. For
this, the government, along with
RBI has come with a seven point
plan known as THE INDRADHANUSH.

The INDRADHANUSH basically

focuses on overcoming the problems
that are being faced by PSBs which
has affected its profitability.
This strategy is capable of
transforming the Indian banking
sector. The fundamental reform is the
change in mind-set from PSBs as an
arm of government to a commercial
entity fulfilling goals. This is a slow,
steady and sensible step towards
revival of PSBs.

SEVEN POINT-AGENDA

APPOINTMENTS..
BANK BOARD BUREAU
CAPITALIZATION
DE-STRESSING
EMPOWERMENT
FRAMEWORK OF
ACCOUNTABILITY.

GOVERNMENT
REFORMS

APPOINTMENTS
The Government has decided to
separate the posts of Chairman and
Managing Director. This approach
intends to prevent authority to one.
The selection process for all the
positions will be transparent and
meritocratic as the human quality on
board in PSBs in past, have been
destroyed due to political interference
as well as lack of transparency.
In addition, performance linked bonus
and ESOPs to the top level executives
in PSBs will be used as the difference
in level of compensation has led to
talent shifting to private sector. The
appointment of private sector
members is expected to bring in the
culture of corporate governance into
the public sector as in case of PS
Jaykumar of Bank of Baroda and
Rakesh Sharma of Lakshmi Vilas
Bank have been made.

BANK

BOARD BUREAU

(BBB)
The Bank Board Bureau is a stepping
stone towards creating a full-fledged
bank holding company- Bank
Investment Company (BIC).
It is just an interim arrangement till the
BIC comes into existence. Once the
BIC is formed, all the roles and powers
of BBB will be transferred to BIC. It
will also replace the Appointments

Board for appointment of Whole-time

Directors as well as Non-Executive
Chairman of PSBs. BBB will be
headed by the RBI.
Objective -

Upgrading the quality of

PSB talent.

Function - The members of BBB will be

constantly engaged with the
BoD of all the PSBs to
formulate
appropriate
strategies for their growth
and development.
The Search Committee for BBB
members would comprise of the
Governor of The Reserve Bank of
India, the Secretary of Finance (SoF)
and Secretary of Department of
Personnel and Training as the
members.

CAPITALIZATION

The estimated capital requirement of

extra capital for the next four years is
likely to be about 1,80,000 Cr. Out
of the total requirement, the
Government of India proposes to make
available 70,000Cr to the banks in
four financial years starting from the
current year (2015-16).
Remaining 1,10,000 Cr will have to
be raised by the banks from the market
based on their efficiency.

The only sin committed by PSBs is they

have lent heavily to the infrastructure
projects that never took off. This led to
requirement of capital for recovering
losses and fixation of management.
As of now, the PSBs are adequately
capitalized and are able to meet all the
Basel III and RBI norms. However, the
Government of India wants to further
capitalize the banks to have a safe flow of
funds over and above the minimum norms
of Basel III.

Basel III Norms

IncludesCapital Adequacy-The amount of
capital banks have to hold as per the
regulator
Stress Testing-The ability to deal with
an economic crisis

Market Liquidity Risk-Assessing how

easily an asset can be liquidated

The distribution of 70,000 Cr is

as follow:Round I

FY 2015-16 25,000 Cr

Round II

FY 2016-17 25,000 Cr

Round III FY 2017-18 10,000 Cr

Round IV FY 2018-19 10,000 Cr

TOTAL

70,000
Cr

25000 Cr, allocated for the current

fiscal year, will be distributed in the ratio
of 2:2:1.
1. The initial 10000 Cr have been
allocated to those banks which require
huge capital support.
2. The next 10000 Cr will be given to the
top six public sector banks i.e. State
Bank of India, Bank Of Baroda,
Bank Of India, Punjab National
Bank, Canara Bank, and IDBI Bank
in order to strengthen them financially.

3. The remaining 5000Cr will be

distributed in first quarter of 2016 on
the basis of performance of banks
during the three quarters in the current
year.
4. The highest allocation from the
kitty of 20,000 Cr (out of 25000
Cr) is made to State Bank of India
followed by Bank of India and
IDBI.
Banks which dont get capital in initial
rounds will get a preference in the last
round.

DE-STRESSING
THE CENTRAL BANK TOPS THE
LIST OF PSBs WITH MAXIMUM
BAD
LOANS
(including
RESTRUCTURED ASSETS). They
stood at 21.5% in April 2015. NPAs are
the major stress for the PSBs as they
affect the profitability of banks and lead
to capital erosion. They are the indicators
of banks credit risk management. Unless
the problem of NPAs is addressed, any
amount of capital infused by government
in the banks wont make a difference.
Power, steel and infrastructure sectors are
the major recipient of PSB funding.

They account for nearly 40% of toxic

loans on the banks' books. The steel
sector is mainly responsible for the
distress, given the scenario in China
which resulted in reduction of global
demand, leading to fall in prices of
steel. With nearly 5 lakh Cr of banking
loans riding on this sector, the problem
of toxic loans is to stay.
Dealing with NPAs necessitates
autonomy to banks without government
intervention as well as a strong
bankruptcy code. An effective
bankruptcy law can offer an exit route
to the promoters and provide freedom
to banks to take over the company
before the value of the underlying asset
declines sharply.
In addition, promoters can be asked to
bring in additional equity to address the
worsening leverage ratio of such
projects. Wherever the promoters are
unable to meet this requirement, the
banks are empowered to consider the
option for substitution or taking over
the management.
The concepts of warning database of
large loans, Joint Lenders Forum (JLF),
Asset
Reconstruction
Companies,
Strategic Debt Restructuring (SDR) and
establishment of six new Debt Recovery
Tribunal (DRTs) have been taken into
consideration by Mr Raghuram Rajan.
According to a research, 25% of
restructuring assets turn into NPAs. This
adds to the stressed assets more.

EMPOWERMENT
Banks are now encouraged to take their
decisions independently, without any
government interference, keeping their
commercial interests in mind.
The government has decided not to
interfere in the operations of banks, in
order to provide them complete
autonomy, so that they can work more
effectively.
With autonomy, comes accountability.
Accordingly, Grievances Redressal
Mechanism for customers as well as for
the staff has been built, so that concerns
of the affected are addressed effectively,
in a time bound manner.

perforrmance linked bonus and ESOPs for

the top management. This will indicate a
shift to profitability rather than the growth in
loans and top line. If profitability metrics get
into the DNA of bankers, Public Sector
Banks may eventually become much better
run organisations.
The evaluation of performance is based on
quantitative and qualitative aspects:
Quantifiable
Criterias
include
Efficiency in use of Capital, Diversification
of Business and Processes, NPA
Management and Financial Inclusion.
Qualitative Criterias include Strategic
Initiatives, Efforts made to Conserve
Capital, HR Initiatives and Improvement
in External Credit Rating.

GOVERNANCE REFORMS
Greater autonomy and flexibility in hiring
of manpower, will be provided. Following
this trend, the GOI has decided to bring
down its stake in IDBI Bank from 76.5%
to 49%.

FRAMEWORK OF
ACCOUNTABILITY
A new framework has been established to
measure the performance of PSBs, called
The Key Performance Indicators or the
KPIs. KPIs will work as a parameter of

The idea of governance reforms focuses on

optimizing capital, digitizing processes,
strengthening risk management, improving
managerial performance and financial
inclusion.
A promise of no interference from the
government, in the matter of commercial
decisions of banks, was made. Banks were
even asked to have robust Grievance
Redressal Mechanism
for
borrowers,
depositors as well as the
staff. The focus of
banks is on improving
the HR management
practices and removing
the barriers to effective communication.

EFFECT OF GOVERNMENT
STAKE REDUCTION IN PSBs

Loopholes in the sevenpoint plan

Where is RBI in this?

The banks have undergone falling market

share and have become incompetent in
comparison to their private peers. The
banks have fetched only negative returns,
adding to their financial stress. Many
Credit
Rating
Agencies
(CRAs)
have downgraded the
PSBs following the
governments idea of
reducing its stake
from them.

RESCUE OF PSBs
Private Equity Investments into
Distressed Asian Banks.
Since the Asian financial crisis, several
private equity funds (including sovereign
wealth funds) have been permitted to buy
stakes in distressed banks.
In Indonesia, Temasek took a 51% stake
in Bank Danamon and a 68% stake in
Bank Internasional Indonesia.
In Japan, ORIX and Softbank Investment
Corporation took control of Nippon
Credit Bank. Hence, private equity has
been a valuable source of capital for
distressed banks in the west.
Thus we can expect a similar support
from the Indian private players to aid the
ailing position of PSBs in India.

The Finmin is taking the lead in every

banking and financial initiative starting
from a massive effort to bring the
unbanked into the banking fold,
modernization of insurance scheme and
now the INDRADHANUSH. Even RBI
had a large team of experts for framing and
implementing various policies. So along
with INDRADHANUSH, there is a need
for clearly specifying the roles and
responsibilities of the RBI, which will
influence the quality of banking operations
in PSBs.

PLATITUDE
INDRADHANUSH
is a seven-point
programme. The government is acting on
just two points that are easy to implement
and have little connection to the core
problems of PSUs. The Appointments and
Capital infusion. The third Bank Board
Bureau is still to be implemented. The four
other points of the Indradhanush look rather
unaddressed:
reducing
bad
loans,
empowerment of management improving
accountability and better governance.

CONCLUSION
Where Indradhanush lacks an action
plan is, with respect to the issue of
NPAs. Of all the seven elements, the
government must focus on reducing
NPAs because unless they are
worked upon, no kind of capital
infusion would revamp them or make
them better. Infact, this would only
add to the fiscal cost of the
government.

The government is even open to use

some of the funds of the NIIF (The
National Infrastructure and Investment
Fund) to set up sector funds like power
funds, which can provide equity in
troubled projects. A TARP like structure
can also be thought of. The Troubles
Assets Relief Programme focused on
purchase of assets and equity from
financial institutions to strengthen the
financial sector.

Unless government ceases to be the

single largest shareholder in these
entities, autonomy would remain on
paper leading to piling up of NPAs.
Also the government reduction of
stakes would automatically eliminate
a host of issues.

Effective implementation of the plan

may give an extra mileage to the PSBs to
compete with the private peers and
eventually outdo them. But given the
present scenario, this seems way too far
from the reality.

PREPARED BY- CREDIT CRUNCHERS

Source-Press conference of Arun Jaitley, www.financialservices.gov.in, www.wordpress.com