Seven steps forward

Evaluating public sector bank rescue plan

Last Friday, the government announced a comprehensive plan to get the public sector banks out of the deep trough they have found themselves in lately. It was labelled "Indradhanush" to reflect the seven elements that comprise the plan. There are essentially four components to the strategy. First, to bolster the step that was taken earlier, more capital will be infused, some of it to all the banks but a portion that is to be allocated based on financial performance. Second, the establishment of a Bank Board Bureau, following up on a recommendation made by the P J Nayak Committee, represents a first step to taking the governance of banks away from the finance ministry. This is intended to be succeeded by a full-fledged holding company, which will take ownership of the government's equity in the banks and be responsible for governance-related matters. Third, there is a proposal to repair bank balance sheets by setting up an institutional mechanism to take on some of the non-performing assets that are currently hobbling bank lending. Fourth, the objective of bringing fresh talent from outside the system into leadership roles has already been embarked upon, with the appointment of two CEOs; the plan is to bring more people in at lower levels, with flexibility in contracts.

All of these are absolutely necessary and welcome measures in dealing with a problem that threatens economic growth and stability. It is quite clear that, notwithstanding their contribution to financial development and inclusion over the past four and a half decades, their relative inefficiency, archaic human resource management and massive asset quality problems will prevent them from playing any significant role in the future. There is no doubt that radical change is imperative, both with a view to deepening and consolidating financial access and meeting the massive capital requirements that ever more stringent prudential norms impose. The question that must be asked is whether the Indradhanush strategy satisfies minimal criteria of radical change.

Unquestionably, all the seven steps are necessary and desirable components of a resuscitation strategy. However, there are some obvious elements that are missing from the overall scheme. One, there is no reference at all to disinvestment, in any way, shape or form. It surely must be considered an option, particularly as new banks come into the market looking for opportunities to scale up rapidly. Branch networks and existing customers are a valuable asset if they can be managed more efficiently. Two, the design and accountability mechanisms of the new governance structures are yet to be articulated. Despite best intentions, these can easily remain vulnerable to political and bureaucratic interference, a privilege that will not be given up easily. Three, there is going to be massive attrition in employees of public sector banks over the next five years. This provides a significant opportunity for organisational restructuring, particularly by way of consolidation of smaller banks into bigger, more viable entities. Some articulation of the government's position on this will add substance to the restructuring debate. Until these gaps are addressed, the strategy risks becoming one in which the rewards are disproportionately low for the efforts made.