3 missing links of Indradhanush, the banking reform blueprint
Where is customer service, rewards for social initiatives and giving PSBs special powers to tackle large borrowers in the seven steps of banking reforms labelled ‘Indradhanush’?
 
The Central Government has announced last week a rainbow of reforms to revitalise the public sector banks, which are struggling to remain above water due to a variety of reasons, many of which are beyond their control. These reforms come as a breath of fresh air and hopefully meet the expectations of banks as well as the banking public since the public sector banks control more than 70% of the banking business in our country.  
 
These initiatives, named by the Finance Ministry as ‘Indradhanush’(rainbow) of reforms are intended to improve the functioning of banks and help them to perform better through several measures including injection of capital and improved corporate governance. 
 
The seven point reform agenda comprises of the following:
 

1. Appointment of heads of public sector banks:

Some time back, the government had decided to bifurcate the post of Chairman and Managing Director of all banks into two posts, a Non-Executive Chairman and a separate Managing Director and CEO for each bank on the lines of private sector banks. But appointments to these posts were held up for a long time pending completion of formalities.  The Ministry has now announced appointments for the following banks:
 
a. Bank of Baroda: While Mr PS Jayakumar, MD & CEO of VBHC Value Homes, has been appointed Managing Director and CEO, Mr Ravi Venkatesan, an independent director at Infosys, has been appointed Non-executive Chairman of Bank of Baroda.  
 
b. Canara Bank: Mr Rakesh Sharma, MD of Laxmi Vilas Bank has been appointed as the new MD & CEO, and Mr TN Manoharan, Director at Tech Mahindra’s public health foundation, has been appointed Non-executive Chairman of Canara Bank. 
 
c. Bank of India: Mr MO Rego, currently Deputy MD at IDBI Bank, has been appointed MD & CEO and Mr G Padmanabhan, retired Executive Director of the RBI has been appointed Non-executive Chairman of Bank of India. 
 
d. Punjab National Bank: Ms Usha Ananthasubramanian, who is currently Chairperson of Bhartiya Mahila Bank has been appointed MD & CEO of Punjab National Bank. 
 
e. IDBI Bank: Mr Kishore Kharat Piraji, Executive Director at Union Bank of India, has been appointed as MD & CEO of IDBI Bank. 
 
f. Vijaya Bank:  Mr G Narayanan, retired Executive Director of Indian Overseas Bank, has been appointed as the new Non-executive Chairman of Vijaya Bank. 
 
g. Indian Bank: Mr TCV Subramanian, retired CMD of Exim Bank, has been appointed the Non-executive Chairman of Indian Bank. 
 
You will observe from the above that the government has appointed MD & CEOs for two banks from the private sector, which is a departure from the earlier practice of promoting existing Executive Directors from other PSBs. The government has, therefore, said that these appointments are subject to the outcome of a writ petition pending in the Supreme Court filed by a former official of All India Bank Officers’ Confederation challenging the government advertisement inviting applications for posts of MD & CEO in top five public sector banks, for which the appointments have been made now as above. 
 
In addition to the above appointments, the selection of MD & CEOs for two other banks and non-executive chairman for the remaining six PSBs is yet to be completed and this is expected to be announced in the next three months. 
 

2. Setting up of Bank Board Bureau:

The Indian government proposes to set up a Bank Board Bureau to serve as a watchdog to monitor key performance of state-run banks. This is supposed to be launched on 1 April 2016, and would take over the appointments role from the government and evaluate strategies for PSBs.
 
This is also the "first step towards a banking investment company which will hold all the assets of the banks, the share-holding assets of the government with the banks," Finance Minister Arun Jaitely, had said.
 
Whether this will be an extra cog in the wheel of the banking system or an institution of value to support the ailing banks will be known in due course, but hopefully it will not be one more tier to delay decisions. 
 

3. Capitalisation of Public Sector Banks:

The government has proposed to capitalise state banks by Rs70,000 crore over the next four years. The first tranche of Rs25,000 crore will be disbursed this year, of which Rs10,000 will go to weak banks.
 
This is against the total capital of Rs2.40 lakh crore, required for all the PSBs as per the earlier estimate of RBI to meet the Basel III requirements before the deadline of 2019. There is, therefore, still a gap of Rs1.70 lakh crore to be raised either by ploughing back from profits or by raising from the market. With the falling profitability of banks and consequent lower valuation of these banks in the stock market, this appears to be a tall order unless the government decides to pump in further capital in the coming years. 
 

4. De-stressing assets of banks:

The government will concentrate on de-stressing the stressed assets of banks for which a special cell has been set up to manage projects and the government was in consultation with various stakeholders in order to facilitate approvals, Financial Services Secretary said.  
 
The deteriorating asset quality and their toll on the profitability of PSBs have been the burning topic for the banks, regulators and the government. To meet the situation, the Reserve Bank of India (RBI) has recently announced a number of steps including takeover of units, which have failed to honour the terms and conditions of restructuring agreed to with the banks. 
 
Though these steps have created a sense of responsibility on the part of the defaulting promoters, it is necessary to further strengthen the process by legally empowering the banks and quicken the whole process of takeover, while at the same time protecting the banks from the adverse effects of long drawn litigation arising from their actions.  
 

5. Empowerment of bank managements:

The government will empower and make it easier for PSBs to hire laterally at middle level thereby giving them a leg up in hiring people for specialised jobs as well. The government was even looking into the legal position to allow banks to make campus recruitment, the Finance Minister said. 
 
There is a proposal to introduce Employee Stock Ownership Plan (ESOPs) for the PSU bank managements which may help in improving productivity at management level.
 
There is a need to incentivise performance for all employees to get the best out of every employee of the bank. At present incentives are provided only at the level of MDs and EDs which do not help in improving the performance of the officers and the workman staff, who need to be incentivised to give them a sense of accomplishment. 
 

6. Framework of accountability:

The government is revising the accountability and performance evaluation methods for PSBs for better results.  It is proposed to move away from the previous method focused on top-line growth or balance sheet expansion to one based on return on asset and return on equity. 
 
What is equally important is to make them accountable for their actions and inactions, including statutory compliance, customer service and more importantly customer satisfaction, which alone can help them to improve their business and profitability. 
 

7. Governance reforms:

“Comprehensive transformation framework is to ensure banks can prepare for the future, have world class governance and autonomy,” Mr Jayant Sinha, Minister of State for Finance has said. He also reiterated Prime Minister Narendra Modi's pledge of zero political intervention into PSBs' commercial operations. 
                                                           
It is to be seen as to how far they will be successful in achieving this lauded objective.
 

Will these steps re-ignite the struggling PSBs?

 
There are three missing links in the whole process of reforms announced by the government. 
 
Firstly, the mission to revitalise banks is conspicuous by the absence of important stakeholder in the business of banking i.e. the banks’ customers. The customer service initiatives should have formed a part and parcel of the rainbow of reforms to enable the PSBs to face competition from the private banks that have certainly an edge over the PSBs as reflected in their performance. In fact, RBI is yet to come out with a comprehensive charter of customers’ rights, which alone can restore the trust and confidence of the public in the state run banks. 
 
Secondly, public sector banks are called upon to perform several social initiatives including opening of branches in remote areas, without being properly compensated for their role in helping the poor and the downtrodden.  While it is perfectly in order for the government to seek the help of PSBs for improving standard of life of people in the villages, it is necessary to reward them suitably depending on their performance in these areas by giving them appropriate concessions in statutory pre-emption like lower statutory liquidity ratio (SLR) and cash reserve ratio (CRR), or such other forms of dispensation to help them recover the additional burden of serving the lower strata of our society, who depend solely on the PSBs for their banking needs. 
 
Thirdly, the high value non-performing assets (NPAs) have been the bane of PSBs, and very little has been done by the government to strengthen the hands of the PSBs even though SARFAESI Act has helped them to a limited extent.  A glaring instance where a powerful industrialist and large borrower with multiple banks could successfully scuttle the efforts of the consortium of banks to declare him as a wilful defaulter, leave alone recovery, is a grim reminder of how PSBs have been taken for a ride by the politically powerful heavyweights right under the very nose of both the RBI and the Central Government. Unless and until the government takes steps to strengthen the hands of banks through special legal powers to tackle large borrowers, there is little hope for any improvement in the performance of banks in our country. 
 
All said and done, only time will tell whether ‘Indradhanush’ reforms will prove to be the mythological ‘sanjeevani’ (miracle cure) for the ailing PSBs and bring them back to robust health. What is crucial for the government is to walk the talk and implement these reforms in right earnest without allowing them to remain only in paper.    
 
(The author is a financial analyst, writing for Moneylife under the pen-name ‘Gurpur’.)
 
Comments
MG Warrier
6 years ago
I agree with Gopalakrishnan. As I had mentioned in my article on the same subject, outsourcing and transfering work to other agencies or private individuals will do more harm in financial sector where skill needs are different from, say, construction industry or coal mines! Employee morale, continuous learning at all levels (this is where we feel the loss of institutions like Bankers Training College where middle level management personnel were groomed) and in general HR management from recruitment to retirement are areas which are presently neglected as decisions are taken by generalists with no banking background.
MG Warrier
6 years ago
I agree with Gopalakrishnan. As I had mentioned in my article on the same subject, outsourcing and transfering work to other agencies or private individuals will do more harm in financial sector where skill needs are different from, say, construction industry or coal mines! Employee morale, continuous learning at all levels (this is where we feel the loss of institutions like Bankers Training College where middle level management personnel were groomed) and in general HR management from recruitment to retirement are areas which are presently neglected as decisions are taken by generalists with no banking background.
Gopalakrishnan T V
6 years ago
High sounding jargons and words are no doubt soothing to the ears and can be a boost to capital market sentiments but the PSBs performance based on the Indra Dhanush ie seven prongs – appointments, bank board bureau, capitalization, de-stressing PSBs, empowerment, framework of accountability and governance reforms is not guaranteed as long as the Human Resources issue which is a major risk right from top to bottom faced by the banks now is not adequately and quickly addressed.
Appointment.
This is a major risk the PSBs face as the Boards of PSBs as of today are neither professional nor committed nor accountable and knowledgeable. The selection of Directors to the Board leaves much to be desired. Directors require thorough knowledge of banking business along with the skills to develop business with an understanding of the Economy, the risks that can emanate from the Government Policies, Regulatory Prescriptions, the linkages with the international economy and the changes that can have a bearing on the operations of banks , technological advancements and the need to ensure close compatability of the human resources skill and the technology on an ongoing basis etc etc. Any Tom Dick and Harry cannot find a place on Banks boards. Who will ensure this in our scheme of things where the Government, the bureaucrats and politicians have a say always and everywhere directly or indirectly in the functioning of banks. Appointment of Auditors is equally crucial as they decide how the balance sheets of banks should appear and decide as to how to project the assets and liabilities camouflaging many items in consultation with the Board or the key person identified by the Board.
The top managemnt, middle management and Human resources at all levels need lot of exposure, knowldge, expertis in specialised areas like Forex, derivatives treasury management, Credit portfolio, Asset Liability Management and Risk management etc. The tendency to save costs on training to HR is a major casualty in Banking and even the regiulator seems to have ignored this aspect with the Closure of the Bankers Training College. This has badly affected the transmission of Monetary Policy and the over all working of banks. It is a surprise to observe that many employees even do not know the existence of the RBI leave alone the regulatory role of RBI, ist role as monetary authority etc. This has already impacted the working of banks to a great extent.
Bank Board Bureau:
The Constitution of the Board and the mode of Selection of the Board Members and its distinct Role to enhance the improvements in PSBs functioning is not very clear and convincing.
Capitalisation:
The present approach to capitalise the banks using Budgetary resources is highly questionable. The banks should generate reasonable profits to enhance capital and minimise the capital requirements by minimising the risks through risky and sticky advances and investments. Here the professionalism natters a lot. Banks should know how to conduct its advances portfolio and should bring the envisaged discipline on the part of the borrowers and the banks themselves. Rating of borrowers and levying of penalty for misconduct in the utilisation of banks funds need to be seriously viwed and made a punishable offence. Capital infusion if at all found essential it should be linked to the performance of Banks Boards, Top management and the contribution that the banks make towards credit expansion, finacial Inclusion, agricultural expansion, industrial growth, support to exports etc. Norms need to be fixed before induction of tax payers money.RBI's rating and opinion should be sought before providing additional capital .
Destressing PSBs and empowerment.
The interference by the Government Banks Bureau and the regulators hould be kept to the bearest minimum. This is easier said than done.
Frame work of accountability and Governance Reforms.
Need proper definition, implementation and periodical examination by an agency taking RBI into Confidence. Can this happen in our set up?
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