The Na Mo government last month sought to push the second generation banking reforms, with a heavy dose of capitalization for public sector banks (PSBs) and unleashing a seven-step plan “Indradhanush” for improvement in their health, crippled by bad loans over the years.
It’s Rainbow features are:-
- Appointments: Separating the post of MD and CEO of PSBs and bring a new post of a “non-executive chairman” which is a measure to bring accountability.
- Bank board Bureau: The top posts of PSBs will be appointed by Bank board bureau which will replace the existing mechanism. It will have members:- 1 chairman,3 officials and 3 experts(2 experts should be in the field of the banking sector).
- Capitalization: Capitalisation of 70,000 crores in the next 4 years for meeting Basel-III and RBI norms.
- De-stressing banks: Presently there is a huge amount of NPAs. An institutional mechanism will be brought to manage NPAs.
- Empowerment: Indradhanush has stressed on empowerment of banks. This includes more autonomy for PSBs and less interference from government side in day to day functioning of banks.
- Framework of accountability: For bringing in accountability of banks, the government has decided to bring a new vector to measure the performance of PSBs, KPI (Key performance indicators).
- Governance: There will be a CRO (Chief risk officer) to make accountability of the risks in PSBs.
NPA and valuation of few PSB compared to the world’s most expensive bank (In term of Valuation) HDFC Bank as follows:-
|Gross NPA to Gross Advances||0.93%||4.25%||3.72%||5.93%|
|Net NPA to Net Advances||0.26%||2.12%||1.89%||3.36%|
|Market Price/Book Value||24.26||1.66||0.98||0.49|
:-As on 31st March 2015.
The announcement of “Indradhanush”, the seven-pronged strategy resembling the seven colors of a rainbow is a welcome step to address the internal and external factor which influence the performance of PSB’s. However, for better implementation of Indradhanush, I believe, the government should be more focused on qualitative aspects like Appointment, Empowerment, and Accountability as all earlier capitalization did not create any perceptible and long-term impact.
With this, it is also important to clean the historical baggage by De-Stressing the banks through focus program like
- Troubled Asset Relief Programme of the US government, where the government buys equity and troubled assets from financial institutions to strengthen the financial sector and /or
- To set up a Stressed Assets Bank to bail out sectors with projects stalled for various issues beyond their ability to address.
Infusion of seven different colors will definitely pave a way for the emergence of very attractive ‘Professional’ PSB in India. To recreate healthy ‘White’ PSB, it is important to mix those seven colors in a right manner and right proportion in currently faltered PSB’s.
Main Contributor : Anirudha