The government on Friday unveiled a seven-point revamp agenda for public sector banks with worrisome levels of stressed assets, the central theme of which was an assertion that their commercial decisions would be left largely to them. Though analysts said the plan lacked an explicit formula for reducing bad loans, consolidation or timeline to lower government stakes to the 52% threshold, the government said a Bank Board Bureau (BBB), vested with the powers of board- and top-level appointments and advisory role on PSB strategies, would be operational by April 2016. The BBB, finance minister Arun Jaitley said, would be an interim arrangement and a holding company of government stakes would supersede it before too long.
The Centre also said of the total proposed capital infusion of R70,000 crore till FY19, R20,088 crore will be infused in 13 banks in a month, with State Bank of India (R5,531 crore), Bank of India (R2,455 crore) and IDBI Bank (R2,229 crore) getting the most.
The government reckons greater professional autonomy envisaged under the revamp plan termed Mission Indradhanush coupled with the solutions to problems faced by sectors that contributed the most to PSBs’ stressed assets — steel, power (including discoms), highways and sugar — would enable the banks to raise capital as and when needed from the market. It is estimated that for keeping a safe buffer of capital over the Basel III norms and in keeping with the credit growth estimate of 12-15% over the next three years, PSBs would need Rs 1.8 lakh crore as additional capital till FY19.
PSBs’ gross non-performing assets (NPAs) stood at 6% of advances at the end of June while another 8% was classified as standard restructured assets, a part of which can be attributed to increased regulatory rigour and, according to the government, resulted also from “historical factors” such as fuel issues for power sector firms.
Jaitley said that “even though a challenging situation did exist, there is no cause for panic” as far the PSBs’ financial health was concerned. “The government has been from time to time reviewing the health of these banking institutions. The nature of the problem is such that some initiatives which we have taken, it has partly been fixed and it is capable of being fixed,” he said.
The BBB will comprise a chairperson, who would be either a retired banker or a regulator or an eminent businessperson, three government officials including the financial services secretary and a deputy governor of the Reserve Bank of India and three professionals from the private sector. The single holding company holding all the government shares in the PSBs being proposed was suggested by the PJ Nayak committee and has the backing of all PSBs.
The government also proposed to professionalise management and the boards through a transparent process of selecting the best available talent, incentivising top management through employee stock options and performance-linked bonuses. To differentiate the poorly performing banks from the better ones, the government has introduced a new framework of key performance indicators (KPI) including on efficiency of capital use (return on assets and return on equity), NPA management, financial inclusion, growth and diversification of business as well as certain qualitative parameters such as external credit rating, asset quality improvement, capital conservation and HR initiatives. Capital infusion from the third tranche of Rs 5,000 crore to be released in the fourth quarter of this year would be as per the KPI parameters.
SBI chairman Arundhati Bhattacharya said, “We wholeheartedly welcomes the plan. This will reinvigorate the public sector banks and strategically enable them to take informed decisions in their quest for greater efficiencies. These steps are likely to alter the scope of the banking landscape in the country and enable it to realise potential hitherto unexplored.”
M Narendra, former chairman and managing director of Indian Overseas Bank, said: “Before the bad loan menace struck PSBs, they maintained a return on equity of 20-25% and a return on assets of 1.5-2%. These measures will make PSBs more competitive and once they are able to tackle the NPA situation, growth will return.”
“ESOP for public sector bank employees is a great move to retain talent,” said Ram Sangapure, executive director, Punjab National Bank.