The panel, which submitted its report to the Reserve Bank of India governor Bimal Jalan on Monday, sends a strong signal that the days of soft options are over and the time is ripe for taking hard decisions to put the state-run banking industry back on the rails.

Among other tings, the report also recommends the selling of the foreign branches and closing down of the subsidiaries of the three weak banks.

Along with these hard options--which are bound to push the militant bank unions to the wall and act as a litmus test for the government's political will--the panel has asked the government to follow a hands-off policy in regard to the banks' management and reconstitute their boards.

The RBI is keen on implementing all aspects of the report and Governor Jalan is expected to take it up as soon as the new government is in place. "Backed by political will, some tough decisions need to be taken to strengthen the Indian banking system. The report has given the right direction towards that end," sources close to the central bank said.

The panel has also recommended the setting up of a government-owned asset reconstruction fund (ARF) managed by a private asset management company (AMC) and a Financial Restructuring Authority (FRA) to closely monitor the progress of the restructuring process at the individual bank level. It also said that the Reserve Bank of India should set up a special wing to supervise weak banks.

The panel has pegged the overall cost of restructuring the three weak banks--in which the Centre has already pumped in Rs 6,740 crore in the form of recapitalisation funds--at Rs 5,500 crore. The panel has, however, ruled out the possibility of the adoption of narrow banking, merger, closure and even privatisation as a solution. "Closure is an extreme option and would need to be exercised after all other options of successful restructuring are ruled out," it said.

Speaking to The Financial Express immediately after submitting the report, panel chairman Verma said: "We have developed a four-dimensional comprehensive restructuring package. It needs to be implemented fully. In isolation, if some of the aspects are followed up, it will not work." Verma admitted that some of the recommendations are tough and would require a firm political will. This would need to be backed by commitments from unions and bank managements to make the recast exercise a success.

"The choice is limited. It is now a situation of cutting the losses both at the human level as well as on the financial side. If we delay in taking decisions, tomorrow we may a reach a stage of no solution," Verma said.

The four dimensions of the recast strategy are: operational restructuring, organisational restructuring, financial restructuring with conditional recapitalisation, and systemic restructuring with legal changes and institutional building.

At the operational recast level, the panel has recommended the selling of the foreign branches of Uco and Indian Bank and the closure of Indian Bank's subsidiaries. The other recommendations are setting up of an asset reconstruction fund managed by a private sector asset management company and cost reduction by cutting 25 per cent of the jobs through a voluntary retirement scheme (VRS) costing Rs 1,100-1,200 crore. This would be buttressed by a five-year wage freeze with effect from November 1997. In case the VRS plan fails, there will be no alternative but to effect an across-the-board wage cut, the report said.

In regard to organisational recast, it has called for a restructuring of bank boards with the withdrawal of government nominees. The report has also said that the chiefs of the banks should have a longer tenure and get the right incentives.

On financial restructuring, the panel has recommended the conditional infusion of Rs 5,500 crore over the next three years, which includes Rs 3,000 crore worth of recapitalisation funds. However, it will not be an open-ended fund infusion as the bank mangements will be required to perform to access the funds.

Finally, on systemic restructuring, the panel has mooted a plan for setting up of an independent agency--the Financial Restructuring Authority (FRA)-- to coordinate and monitor the progress of the weak banks' recast programmes. The task of the body will be to approve the bank-specific recast plans, enter into agreements and monitor the progress besides owning the ARF on behalf of the government. Both FRA as well as ARF will be wound up with the completion of the recast process.

The RBI had, in February this year, set up the panel under the chairmanship of former State Bank of India chairman MS Verma to suggest measures for the revival of weak public sector banks. Apart from Verma, the other members of the panel are Vysya Bank chairman KR Ramamurthy, chartered accountant MM Chitale, Icra managing director PK Choudhary, former RBI executive director JR Prabhu and former director of the Indian Management Institute, New Delhi, Sushil Chandra.