The Indradhanush (rainbow) design for rejuvenating public sector banks (PSBs) is quite wholesome, addressing the issues that confront them. Does it offer something new or is the new design a revised version of the old? This is the question posed by critics as the problems have been known for long, as have been the solutions. The test really is in tracking how these ideas progress over time.
Indians, as a rule, love to play with words, and just like we had the ‘100 small steps’, we have the first 7 letters of the English alphabet being used as the brush to sketch a rainbow which poses and addresses simultaneously the problems confronting the banking system.
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.
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. 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 R80,000 crore— the aggregate recapitalisation requirement is of
Rs 1.8 lakh crore, of which only Rs 70,000 crore will come from the government.
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.
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.
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.
The last part of Indradhanush, concerning governance, will depend on how banks are allowed to function and the persons who influence decision-making. This would follow from the segments discussed earlier in this column.
The rainbow metaphor puts together succinctly the issues confronting banks, just like we had the CAMELS approach earlier. 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.
The author is chief economist, CARE Ratings. Views are personal