CA Swaraj Chhallani

In the backdrop of P J Nayak Committee report on “Governance of the Boards of Banks in India” and the increasing economic compulsions to augment asset quality of banks, Mission Indradhanush has been launched by Ministry of Finance. The mission aims at revamping the public sector banks so that they can compete with the private sector banks.

The seven shades of Indradhanush mission include appointments, board of bureau, capitalization, de-stressing PSBs, empowerment, framework of accountability and governance reforms. Let’s have a look at them one by one.

Appointments

As per Indradhanush mission the posts of Chairman and Managing Director in PSBs are to be split into a) MD and CEO and b) Non Executive Chairman. Such a division of posts is based on best global practices. The selection process will be more transparent and based on meritocracy. Also private sector executives will be hired to run PSBs.

Bank Board Bureau (BBB)

The BBB will be body of eminent professional which will replace appointment boards of PSBs. It will also help in formulating appropriate strategies for growth and development of PSBs. Such a bureau fall short of recommendation made by P J Nayak Committee for formation of Bank Investment Company which will be holding company for all PSBs. Stake held by government in PSBs is recommended to be transferred to such a company.

Capitalization

The government has shown its intent to adequately capitalize all the PSBs to have safe buffer over and above the minimum capital requirements stipulated as per Basel III norms. Underlying this, government have estimated capital requirement based on credit growth rate of 12% to 15% for next few years. The estimated capital requirement is Rs. 1,80,000 crores of which Government will infuse Rs. 70,000 crores through budgetary allocations. Further banks can also raise capital from capital markets.

De – Stressing

With good economic growth in pre 2008 period, the core sector and the real estate sector was funded massively by banks. But due to many factors much of the projects have been stalled leading to increasing NPA. Considering these stressed assets, the mission has spelled out an institutional mechanism for managing NPAs. Under this Asset Reconstruction Companies will be strengthened to deal with NPAs. Also the Reserve bank of India has come up with a new category of borrower called Non Cooperative borrower i.e. a borrower who does not provide information on its finances to the bank.  Also Ujwal DISCOM Assurance Yojana (UDAY) is an extended arm of such distressing. Also to revive steel sector, import duty on steel was increased. Also early recognition of financial distress and formation of Joint Lenders Forum will be encouraged. Further, six new Debt Recovery Tribunals (DRT) (at Chandigarh, Siliguri, Hyderabad, Ernakulum, Dehradun, Bengaluru) have been set up to speed up the recovery of bad loans.

Empowerment

Banks will be encouraged to take decisions independently and government interference will be minimized. Increasingly focus is been made on Grievances Redressal Mechanism for customers and staff so that concerns are addressed in time bound manner. Also a greater flexibility will be provided in hiring manpower. Government is also looking forward for introducing ESOPs.

Framework of Accountability

Currently a Statement of Intent is made by RBI and Ministry of Finance to measure the performance of banks. Under this banks used to come annual targets. The entire exercise was much time consuming and the statement was finalized in yearend thus defeating its very purpose. Under the new framework Key Performance Indicators will be used to measure performance of PSBs. Such KPI is divided among various sections total amounting to 100 marks as follows

  • efficiency of capital use (25 Marks)
  • diversification of business/processes (25 Marks)
  • Indicators under NPA management (15 Marks)
  • Indicators under financial inclusion. (15 Marks)
  • Qualitative criteria like initiatives taken to improve asset quality, conserve capital and improving credit rating. (20 Marks)

Such a performance evaluated through KPI will be linked to the performance bonus to be paid to MDs and CEOs of the PSBs.

Governance Reforms

Governance reforms focuses on optimizing capital, improving managerial performance, digitizing processes, strengthening risk management and financial inclusion. Under this a Chief Risk Officer will be nominated in each bank. The governance reforms were initiated at Gyan Sangam Bankers’ Retreat” held at Pune in January 2015.

The economy is optimistic of the mission considering its holistic approach and target at the root causes. But much more will be needed to address the factors retarding the growth of PSBs. The issues of disinvestment and recruitment at middle level are still lagging behind and needs to be addressed.

(Author can be reached at swaraj.chhallani@gmail.com)

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