The Public Sector Banks (PSBs) plays a vital role in Indian financial system. The asset quality of public sector banks (PSBs) have deteriorated because of the rising non-performing assets (NPA). Public Sector Banks which have got predominant share of infrastructure financing have been sorely affected due to stalled projects and delay in approvals. It has resulted in lower profitability for PSBs, mainly due to provisioning for the restructured projects as well as for gross NPAs.
P. J. Nayak Committee was constituted to Review Governance of Boards of Banks in India by the RBI Governor in 2014. The Committee suggested certain important recommendations as given below:
• Scrapping and removal of Bank Nationalisation Acts, SBI Act and SBI (Subsidiary Banks) – because this act requires government to keep its shareholding above 50%.
• Government should transfer its shares of PSBs to Bank investment Company (BIC), with functional autonomy.
• Conversion of PSBs into Companies as per the Companies Act.
• Appointments of CEOs, Directors and top Executives of PSBs would be the responsibility of the Bank Boards Bureau
The government has accepted almost all major recommendations of P J Nayak Committee, except bringing down government stake below 51% by unveiling a seven pronged Indradhanush plan for revival of PSBs.
The following are the seven reform measures under the Indradhanush plan:
1. Appointments: The Government decided to separate the post of Chairman and Managing Director. In subsequent appointments 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. The selection process for both these positions will be transparent and meritocratic. Private sector candidates can also apply for the above positions.
2. Bank 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 Bank Board Bureau will comprise of a Chairman, 3 officials and 3 experts (of which two would necessarily be from the banking sector). The Search Committee for members of the BBB would comprise of the Governor, RBI and Secretary (FS) and Secretary (DOPT) as members. The BBB will start functioning from the 01st April, 2016.
3. Capitalization: In addition to profits the PSBs will require an extra capital of about Rs.1,80,000 crore up to FY 2019 to meet the Basel III norms of capital adequacy. Out of the total requirement, the Government of India proposes to make available Rs.70,000 crores out of budgetary allocations over four years and the remaining Rs. 1,10,000 crore would be raised from the market.
4. a) De-stressing PSBs: The infrastructure sector and core sector have been the major recipient of PSBs’ funding during the past decades. But due to several factors, projects are increasingly stalled/stressed thus leading to NPA burden on banks. In steel industry stress is there due to global overcapacity and demand and slowdown, similarly power and Road sector are also in stress due to cancelation of coal blocks and delay in clearances and permit.
To address these structural issues an institutional mechanism will be brought to manage NPAs.
b) Strengthening Risk Control measures and NPA Disclosure:
Besides the recovery efforts under the DRT & SARFASI mechanism the following additional steps have been taken to address the issue of NPAs:
i. RBI has released guidelines “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy”
• Creation of a Central Repository of Information on Large Credits.
• Formation of Joint Lenders Forum (JLF), Corrective Action Plan (CAP), and sale of assets.
ii. Flexible Structuring of Loan Term Project Loans to Infrastructure and Core Industries – RBI issued guidelines
iii. Willful Default/Non-Cooperative Borrowers: Fresh exposure to a borrower reported as non-cooperative will necessitate higher provisioning.
iv. Asset Reconstruction Companies: RBI has tightened the norms for Asset Reconstruction Companies (ARCs) the minimum investment in Security Receipts should be 15% which was earlier 5%. This step will increase the cash stake of ARCs in the assets purchased by them.
v. Establishment of six New Debt Recovery Tribunals (DRTs).
5. Empowerment: There will be no interference from Government and Banks are encouraged to take their decision independently keeping the commercial interest of the organization in mind. Banks have been asked to build robust Grievances Redressal Mechanism for customers as well as staff so that concerns of the affected are addressed effectively in time bound manner.
6. Framework of Accountability: The present system for the measurement of bank’s performance was a system called SOI – Statement of Intent which takes very long time.
A new framework of Key Performance Indicators (KPIs) is to be measured for performance of PSBs. 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/processes and 15 marks each are allotted for specific indicators under the category of NPA management and. financial inclusion.
The remaining 20 marks are reserved for measurement of qualitative criteria which includes strategic initiatives taken to improve asset quality, efforts made to conserve capital, HR initiatives and improvement in external credit rating.
7. Governance: Government has started “Gyan Sangam” - a conclave of PSBs and FIs to discuss issues of concerns to optimize governance in banking sector. There will be a CRO (Chief risk officer) to make accountability of the risks in PSBs. Less interference from government and appointments of top officials by Bank Boards Bureau are some of the administrative changes induced to improve governance.
The Indradhanush framework for transforming the PSBs like the seven colour of rainbow represents the most comprehensive reform effort undertaken since banking nationalisation in the year 1970.
Public sector banks accounted for the largest share of 72.9 per cent in aggregate deposits and 71.6 per cent in gross bank credit followed by private sector banks (19.7 per cent and 20.9 per cent, respectively) as on March 31, 2015 (RBI)
For realizing “Make in India” a robust public sector banking institution is a must. Asian economies like South Korea and Japan have been able to develop their manufacturing base because of cheap financing availability and robust financial Institutions. The Indradhanush plan augurs well with the CAMELS approach for the sound banking system.
C - Capital adequacy
A - Asset quality
M - Management quality
E – Earnings
L – Liquidity
S - Sensitivity to Market Risk