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The MS Verma committee on weak banks has ruled out privatisation, mergers and acquisitions while recommending conditional recapitalisation.

"Recapitalisation must be accompanied by strict conditions relating to the operating as well as managerial aspects of the recipient bank's working," says the report. It outlines a four-fold strategy involving operational, organisational, financial and systemic restructuring.

The report recommends that weak banks cut staff strength by as much as 25 per cent in order to reduce costs which are grossly out of line with the income streams. The committee has suggested a five-year wage freeze in these banks, with retrospective effect from the last wage settlement, effective November 1997, currently under negotiation.

 

The entire exercise is expected to cost the exchequer Rs 5,500 crore over three years, with a tax outflow of Rs 1,300 to 1,400 crore. The government would have to bear a direct cost of Rs 3,000 crore for recapitalising the banks and another Rs 1,000 crore to fund the ARF.

Based on seven criteria, the committee has identified the Calcutta-based Uco Bank and United Bank, and the Chennai-based Indian Bank as weak. Another six banks _ Allahabad Bank, Central Bank of India, Indian Overseas Bank, Punjab & Sind Bank, Union Bank of India and Vijaya Bank _ are listed as showing incipient signs of distress. Though these banks met the capital adequacy criteria, they failed on as many as five to six of the identification parameters.

The committee has suggested a one-time clean up of balance sheets by transferring contaminated assets to a government owned Asset Reconstruction Fund (ARF), while focusing on internal restructuring to restore operational sustainability of operations. This involves ways to cut costs, boost income streams and upgrade skills to prevent a build-up of further non-performing assets.

The committee has also suggested across-the-board 25 per cent cuts in wage costs to restore the balance if the proposed voluntary retirement scheme (VRS) does not go according to plan.

A VRS will have to be funded by the exchequer at an estimated cost of Rs 1,100-1,200 crore.

The committee has stressed information technology upgradation at these banks in order to boost their revenue earning streams and streamline operations. The package is expected to cost Rs 300 to 400 crore.