Indradhanush lacks measures to tackle NPA: CRISIL Ratings

Indradhanush, the seven-pronged strategy for public sector banks announced by the government has fallen short of three crucial ingredients - setting up a 'bad bank' to address the issue of non-performing assets (NPAs), disproportionately higher upfront capital infusion, and tackling human resource problems in mid-to-senior levels - according to CRISIL Ratings.

These three steps could have helped in building additional confidence, the analytical and research firm said in a note on Sunday. However, CRISIL noted the government's strategy could boost the performance of public sector lenders. The government had announced higher capital infusion for 2015-16 and 2016-17. According to one plan, Rs 25,000 crore would be infused this year (FY16), the same amount the next year, and Rs 10,000 crore each in 2017-18 and 2019-20. The government had on Friday said it would infuse Rs 20,088 crore into 13 public sector banks within a month's time with the country's largest lender, State Bank of India, cornering Rs 5,531 crore. It also announced top-level appointments in five public sector banks. According to the CRISIL note, the plan to provide a clear roadmap on capital infusion and maintain a capital buffer beyond the regulatory minimum reinforces its stance that the credit ratings of public sector banks would remain in the 'high safety' category in the near term.

"The proposals can help public sector banks effectively deal with the malaise of NPAs, and potentially grow faster than our earlier estimate of 12 per cent annually till fiscal 2019," CRISIL noted. It said Indradhanush takes cognizance of both internal and external factors that influence the performance of public sector banks. The internal ones are better governance, greater efficiencies and a performance evaluation framework that incentivises management focus on capital conservation and credit rating.

The external factors are linked to legal, recovery and dispute resolutions such as coercing promoters to sell non-core assets, setting up fraud resolution processes and six new debt recovery tribunals, and enhancing the role of asset reconstruction companies.

It added the plan would also rely on the efforts made by the Reserve Bank of India such as the setting up of a Central Repository of Information on Large Credits and the Joint Lenders' Forum, its guidelines on reporting of 'special mention accounts' and the wilful defaulter framework.

According to the note, the timeline given for setting up a Bank Board Bureau from the next financial year and the announcement of inducting professionals as non-executive chairmen will eventually drive qualitative changes in governance, strategy formulation, capital efficiency, and human resource practices.

Besides, allowing bonus and stock options for senior management will make public sector banks competitive and go a long way in attracting the right talent.

Crisil business head Raman Uberoi said: "A successful implementation of Indradhanush and a simultaneous deepening of the corporate bond market will vastly improve India's investment and growth potential."

According to him, it's good to see the government recognise the challenging external environment and show determination to identify the causes behind problems in sectors such as steel, power distribution and power generation. "Going forward, this will help policymakers script effective solutions."