Banking sector reforms set to get bigger and better

Centre to widen scope of these reforms; better risk management, financial inclusion and expanding digital banking to be focus areas

The government is mulling Indradhanush-II, expanding the scope of banking reforms to get rid of bad loans, manage risks better, bring millions of un-banked and under-banked people into the fold as well as create a holding company for the public sector banks (PSBs).

Indradhanush - a seven-pronged strategy to revamp functioning of PSBs through professional appointments, creation of Banks Board Bureau (BBB), re-capitalisation, de-stressing, empowerment, accountability, and governance reforms - was launched by Prime Minister Narendra Modi-led government in August last year.

RAINBOW OF HOPE FOR INDIAN BANKING

FOCUS AREAS UNDER INDRADHANUSH-II

• Moving from recognising NPAs to setting up resolution mechanisms
• Risk analysis strategies and risk management practices
• Financial inclusion and expansion of digital banking
• Credit growth and use of modern technology
• Further push to restructurings, as well as M&As
• Creation of Bank Investment Company (BIC), a holding company for PSBs

Amid rising stress levels among the PSBs, some of the ideas for Indradhanush-II were discussed during the second edition of Gyan Sangam, a bankers' retreat held in March.

"There is a thinking within the government that we should have an Indradhanush-II. In all fairness, we have done appointments, formed a Banks Board Bureau, gone ahead with recapitalisation and initiated consolidation process with the State Bank of India merger plan. There is scope for more," said a senior finance ministry official.

Indradhanush-II is likely to chart out the process for resolution of non-performing assets (NPAs). "The focus will now shift towards the resolution process from just recognising the NPAs. A framework is being worked upon on how resolutions could move expeditiously," the official added.

State-run lenders posted losses of over Rs 20,000 crore in the fourth quarter of 2015-16, only on account of cleaning-up effort launched by the Reserve Bank of India (RBI). As a part of asset quality review, the RBI had directed banks to classify several accounts as NPAs in the third and fourth quarters of FY16.

The proposed resolution process for banks is also being discussed by the department of economic affairs. "Resolution process is still work in progress. This is one area which will be central to the next stage of reforms," said another top official.

Apart from resolution, risk management, financial inclusion, expansion of digital banking, credit growth and use of modern technology are among the areas that are likely find a mention in Indradhanush-II.

"The whole idea is to go after the root cause of stress and address it. We will focus on risk analysis strategies and risk management practices," said the official. It is also likely to give a push to restructuring as well as mergers and acquisitions.

WHAT INDRADHANUSH HAS ACHIEVED SO FAR

Appointments

• Managing directors and non-executive chairmen of five PSBs appointed

Banks Board Bureau

• BBB begins functioning from April 1, with ex-CAG Vinod Rai as chairman
• To come up with mechanism for resolution of NPAs

Capitalisation

• Rs 25,000 crore allocated to PSBs in FY16
• Additional Rs 25,000 crore to be infused in FY17, followed by Rs 10,000 crore each in FY18 and FY19
• FM Arun Jaitley has promised additional capital allocation, if needed

De-stressing PSBs

• Imposed anti-dumping duty and minimum import price on steel
• Launched UDAY to bail out power discoms
• Action on textiles and further action on steel being planned

Consolidation

• SBI has proposed to merge with its five associate banks and the Bharatiya Mahila Bank

Some elements of the existing plan are likely to be reviewed. "None of these measures can be implemented within a fixed time period. It is important to ensure that the decision is right from the viewpoint of the prevalent market conditions. They need to be reviewed from time to time," added the official.

Bad loans declared by PSBs rose from Rs 2.67 lakh crore in March 2015 to Rs 3.60 lakh crore at the end of December 2015. The gross NPAs increased from 5.43 per cent of advances in March 2015 to 7.3 per cent of advances in December.

The consolidation process has already begun with the SBI proposing to merge with its five associate banks as well as the newly-created Bharatiya Mahila Bank.

After the formation of BBB, led by former comptroller and auditor general (CAG) Vinod Rai in April, a legislation to create a holding company for PSBs is also in the making. The holding company, to be named as Bank Investment Company (BIC), will free the management of banks from direct government interference. Rai recently said the proposal for BIC will be discussed after consolidation and appointments are taken care of.

Many see Indradhanush as most comprehensive reform of PSBs undertaken since nationalisation of banks in 1970.

Total stressed assets of Indian banking system stand at Rs 8 lakh crore. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (also known as Sarfaesi Act) would be amended to enable banks to recover NPAs speedily, with fewer legal hurdles.

The Debt Recovery Tribunal (DRT) will also be streamlined to shift its processes online and ensure faster processing of cases. As part of recapitalisation drive, the government has promised to infuse Rs 70,000 crore in PSBs in a four-year period. PSBs received Rs 25,000 crore last year and will get an equivalent amount this year, followed by Rs 10,000 crore each in FY18 and FY19.