Thursday 10 September 2015

Mission Indradhanush for Public Sector Banks (PSBs)

Indradhanush, a major step after the nationalisation of banks in 1970s, is a brainchild of PJ Nayak committee.

1) 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

2) Bank boards Bureau: The top posts of PSBs will be appointed by Bank boards 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 banking sector).

3) Capitalization: Capitalisation of 70,000 crores in the next 4 years for meeting Basel -III and RBI norms.

4) De-stressing banks: Presently there is a huge amount of NPAs.An institutional mechanism will be brought to manage NPAs.

5) Empowerment: Indradhanush has stressed on empowerment of banks.This includes more autonomy for PSBs and less interference from govt side in day to day functioning of banks.

6) Framework of accountibility: For bringing in accountability of banks, govt have decided to bring a new vector to measure the performance of PSBs, KPI (Key performance indicators).

7) Governance: There will be a CRO(Chief risk officer) to make accountability of the risks in PSBs.Less interfrence from govt: and appointments of top officials by bank boards bureau are some of the administrative changes the govt brought.

Issues Indradhanush could not answer:

1)Disinvestment of PSBs: Disinvestment which is a necessary tool of growth of this time, is not mentioned in Indradhanush.

2)About 80,000 employees are expected to retire in coming two years. And some more are expected to retire in coming years. So , there is an opportunity for govt: to restructure banks, but such a measure is not mentioned.

3)Even though issue of govt: interference is mentioned in the policy, how exactly it would be implemented is not mentioned.

4)Regarding capital infusion, whether the govt: will infuse money to the PSBs according to their performance is not mentioned. Rather than giving capital to all the PSBs, govt should have given it according to the performance of the PSBs in a year.

5) How efficiently the Bank Board Bureau performs that remains to be seen. If it acts just as a proxy for government end result might come out to be the same. Moreover it's accoutability needs to be fixed and government interference must be kept at the minimal level.
Not addressed - 2) Merger of the small banks inefficient banks with the larger ones.
3) Tackling the human resource problems from mid-higher levels.

  • PSBs face three stark realities and their weak governance is the underlying cause. 
    • Goernment owns PSBs so social welfare, Financial inclusion has to be there --> although they are largely uncompensated for pursuing such goals — it’s difficult to argue that the government’s style of running its banks has served either itself or the banks well.
    • High leverage of PSBs, politically connected wilful defaulters, the burgeoning stress in the balance sheets and the consequent deterioration in the supporting capital, declining profitability and productivity ratios and the dwindling market share of PSBs, are debilitating these banks and making them unequal competitors vis-a-vis their private-sector counterparts. 
    • Third, as the major share of financial savings is intermediated through PSBs that are also the dominant purveyors of loan finance for infrastructure-creation and manufacturing, continuous weakening of their balance sheets is a cause for concern that is far too serious for complacency. One would like to presume that these concerns are acknowledged by the political system and bureaucracy, although that doesn’t become eminently apparent from Indradhanush.
Against this bleak backdrop, the plan’s seven elements appear to fall short and are sketchy.


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