Big bang reforms for govt banks

Seven-point plan includes bank board bureau from April 1, appointment of private sector professionals as heads

Finance Minister Arun Jaitley on Friday announced a seven-pronged strategy to revamp public sector banks (PSBs) so that selection of their chiefs could be transparent, their bad debts reduced and their performance improved. Highlighting that political interference in the functioning of these banks had to be minimised, the government also appointed chief executive officer (CEO)-managing directors (MDs), as well as chairmen for five such lenders, two of them from the private sector, a first.

Termed 'Indradhanush', the seven-pronged strategy includes streamlining of appointments, setting up of a bank board bureau (BBB) to scout for heads of PSBs, recapitalisation measures and facilitating easing of non-performing assets (NPAs) to help ensure improved credit. The seven broad heads of the strategy are appointments, a BBB, capitalisation, de-stressing PSBs, empowerment, framework of accountability and governance reforms.

On Friday, MD and CEOs of five banks were appointed, as were non-executive chairmen of five lenders, with Canara Bank, Bank of Baroda and Bank of India common to both the segments. CEO-MDs of IDBI Bank and Punjab National Bank were also named, while non-executive chairmen were appointed for Vijaya Bank and Indian Bank.

Managing Director and CEO of VBHC Value Homes, P S Jayakumar (53), has been selected to head Bank of Baroda, while Rakesh Sharma (57), MD and CEO of private lender Laxmi Vilas Bank, will head Canara Bank. Besides, Ravi Venkatesan (51), independent director of Infosys, was appointed non-executive chairman of Bank of Baroda and T N Manoharan (59), director of Tech Mahindra Public Health Foundation, was named non-executive chairman of Canara Bank.

Announcing the Indradhanush strategy, Jaitley said a holding company -bank investment committee - would be set up to own shares in state-owned banks on behalf of the government. This would be preceded by the setting up of a BBB, some of whose functions would be subsumed under the proposed holding company.

With this, most recommendations of the P J Nayak committee have been accepted by the government. However, its suggestion to cut government stake in these banks below 50 per cent has been turned down.

To help the managements of public sector lenders participate in the performance of these banks, the government said it was considering employee stock ownership plans.

The finance ministry said first, two tranches of capital infusion worth about Rs 20,000 crore would be provided to 13 banks, with State Bank of India (SBI) set to get a quarter of the amount (Rs 5,511 crore), followed by Bank of India (Rs 2,455 crore) and IDBI Bank (Rs 2,299 crore) next month. About Rs 5,000 crore would be infused on the basis of efficiency, based on quantitative and qualitative parameters (while qualitative parameters will account for 80 per cent, qualitative yardsticks will account for the rest). While quantitative parameters include efficiency of capital use, growth, diversification of business, NPA management and financial inclusion, qualitative ones include improvement in external credit rating, strategic initiatives to improve asset quality, efforts to conserve capital, and human resource initiatives.

Last year, the government had infused about Rs 6,900 crore into these banks, primarily based on return on capital and assets, drawing flak from various quarters.

About Rs 45,000 crore would be further infused into state-run banks through the next three years.

THE 7 SHADES OF INDRADHANUSH

Appointments

1. Selection of non-executive chairmen in the remaining 6 state-owned banks over the next 3 months
2. Appointment of MD&CEO in the two other banks as early as possible

Bank board bureau

1. Members to be selected in the next six months
2. BBB will become functional from April 1, 2016

Capitalisation

1. Allocation of first 2 tranches (Rs 20,000 cr) by next month
2. Performance-based allocation of Rs 5,000 cr in Mar ‘16

De-stressing PSBs

1. To develop vibrant corp debt market to reduce lending pressure on banks
2. Strengthening of asset reconstruction companies

Empowerment

1. Provide greater flexibility in hiring manpower

Framework of accountability

1. Streamlining vigilance process for quick action for major frauds, including connivance of staff

Governance reforms

1. Next Gyan Sangam from Jan 14 to 16, 2016
2. Esop scheme for top management
3. Bank holding company
4. Other strategic initiatives such as consolidation

"PSBs play a very important role in the country's economy. However, they are facing a challenging situation through a few years. The government has, from time to time, been reviewing the health of PSBs. It believes there is no cause for panic at all, as some of the issues have been fixed and others will be fixed with the initiatives we take," Jaitley said.

Under the plan, asset reconstruction companies will also be strengthened to deal with bad loans.

Financial Services Secretary Hasmukh Adhia said, "There is no need to worry too much about restructured assets. We have also constituted a cell to monitor stressed projects."

On rising NPAs, Jaitley said, "While a positive movement was seen in the highways sector, steel, power discoms and sugar were predominantly responsible for this stress. Some states need urgent reform measures in the power sector and we are trying to convince them to adopt the required steps."

The proposed six-member BBB, also announced in Budget 2015-16, will essentially scout for and select heads of PSBs and help them develop differentiated strategies for raising capital through innovative financial methods and instruments. While the members of the board will be selected in the next six months, it will be functional from April 1, 2016. The board is a step towards establishing a holding and investment company for banks.

"We are seeking to transform Indian PSU banks, as these banks are the core of the finance system," said Jayant Sinha, minister of state for finance.

The government said there was a need to develop a vibrant corporate debt market to reduce lending pressures on banks.

Asked about merger of Bharatiya Mahila Bank with SBI, Jaitley said no decision had been taken on the matter so far.

Earlier, the National Democratic Alliance government had cancelled the appointments proposed by the United Progressive Alliance government. Subsequently, it had decided to split the post of chairman and managing director into those of non-executive chairman and MD & CEO, and had advertised about recruiting for the latter.

Last year, a committee was set up to examine the selection process for the posts of chairman & managing directors, and executive directors of public sector banks for 2014-15, following the arrest of then Syndicate Bank chairman and managing director S K Jain for allegedly accepting a bribe of Rs 50 lakh to enhance the credit limits of some companies.

In April this year, the government had eased the eligibility criteria for the chiefs of PSBs (in terms of age and experience of applicants). While the age limit was raised from 55 to 57, the compulsory board-level experience required was cut from three years to a year.