PSBs to be recapitalised in Q4 FY19, exercise linked to progress on reforms

BCG roped in to measure bank-wise performance of reforms agenda and present a report card

The final round of recapitalisation of public sector banks (PSBs) under the National Democratic Alliance government’s tenure may happen during the fourth quarter of this financial year (2018-19). In a first, the recapitalisation exercise will be linked to the performance of 21 PSBs in executing the 30-point reforms agenda chalked out by the Centre. The Indian Banks’ Association (IBA) has roped in Boston Consulting Group (BCG) to bring out a report card on the compliance of the reforms agenda, known as EASE — Enhanced Access and Service Excellence.

BCG has been tasked to submit the compliance report by December this year, a senior finance ministry official said, based on which the Centre will take a call on the amount of funds to be allocated to each state-owned bank this financial year. The official said PSBs were “adequately capitalised” for now and all of them were meeting the minimum capital requirement, stipulated by the Reserve Bank of India. The IBA had invited bids in May this year and the lowest cost for the project was proposed by BCG, according to the official.

The Centre has already infused Rs 113 billion in five banks — Punjab National Bank (PNB), Corporation Bank, Indian Overseas Bank, Andhra Bank, and Allahabad Bank – this year, but that sum was to support them in meeting the regulatory capital requirements.

The Union government had last year announced a Rs 2.11 trillion plan to recapitalise PSBs that were grappling with a high level of bad loans, mainly attributed to “aggressive lending” in the past few years, leading to losses. According to the recapitalisation plan, to be implemented in a phased manner, the capital infusion by the government was to the tune of Rs 1.53 trillion and the banks were required to raise the remaining sum from the market on their own. 

The contours of the first round of recapitalisation, worth Rs 881 billion for 2017-18, was announced in January and the Department of Financial Services Secretary Rajiv Kumar had said that the capital infusion of Rs 650 billion in 2018-19 will depend upon the performance of banks on the EASE agenda.

All PSBs have secured approval from their respective boards to implement the EASE plan. Banks have already started working on the 50-point action plan which has been divided into six themes — customer responsiveness, responsible banking, credit offtake, PSBs as udyamimitra for micro, small and medium enterprises, deepening financial inclusion and digitisation, and human resources outcomes. 

BCG has been tasked to do a “quantitative and qualitative assessment” of the banks on these defined themes. It will have to set up and validate the methodology for measuring the reforms plan and data collection and do an analysis of the outcomes. The government will bring out a report card on the compliance of these measures every year.

BCG will also be required to do knowledge transfer to the IBA for “effective ongoing performance improvement” of the EASE plan from next year onwards. The EASE programme was based on recommendations made by whole-time directors and senior executives of bankers during PSB Manthan, a two-day conclave of PSBs, in November last year.

Under the reforms agenda, PSBs are required to create a stressed asset management vertical, tie up with agencies for specialised monitoring of loans above Rs 2.5 billion, conduct strict surveillance of big loan defaulters, and appoint a whole-time director for monitoring reforms every quarter, among various other things.

Banks like PNB, Oriental Bank of Commerce, and Bank of Baroda have created a separate vertical to deal with stressed assets. PNB has shifted around 3,000 executives from operations department across the country into the stressed assets vertical that started functioning from June 1. Four general managers have been tasked with heading the recovery vertical as a part of the bank’s strategy to fast-track recovery of non-performing assets.

Reforms agenda: What banks are supposed to do
 

• Support banking from home and mobile to make branch visits redundant
• Creation of a separate stressed asset management vertical
• Tie-up with agencies for specialised monitoring for credit exposures above Rs 2.5 billion
• Reduce size of consortium with a minimum 10 per cent exposure for each participating bank
• Do strict segregation of pre- and post-loan sanction roles and responsibilities
• Reduce corporate exposure share to below 40 per cent by March 2019 
• Online loan application facility for home, education, vehicle, and other personal loans
• Time-bound and automated processing of MSME loan proposals
• Performance management system to reward top performers for 2018-19