The Hindu Business Line : MoU plan for PSU banks dropped

THE proposed exercise of signing memoranda of understanding (MoUs) between the Ministry of Finance and public sector banks has been given a premature burial by the Government.

Instead of setting `rigid' MoU targets as `minimum assurance' from the PSBs, the Ministry is now planning to adopt a loose arrangement of eliciting what is to be termed as a `statement of intent of annual goals.' The statement would act as a performance evaluation of the functioning of the bank's management for the fiscal.

"We might term the arrangement as a `statement of intent of annual goals' instead of calling it an MoU," a senior Finance Ministry official said. The first set of statements of intent for the current fiscal is to be agreed upon soon.

The proposal to enter into MoUs was announced barely three weeks ago during the meeting of the Union Finance Minister, Mr P. Chidambaram, with the chief executives of PSBs on June 3.

The swift move to give a new look to the exercise of setting annual targets comes due to the realisation by the Ministry that entering into the rigid MoU structure could be construed as unwarranted interference in the working of banks at a time when the pervasive mood is to allow them progressive freedom to operate as fully board-run entities.

There has also been concern within the Ministry on whether the Government, being one of the many shareholders in PSBs, could call for such performance guarantees. Out of the 27 PSBs, the 100 per cent Government-owned banks are Indian Bank, United Bank of India, Punjab and Sind Bank and Central Bank. Moreover, the Government does not have a direct holding in the SBI Group banks.

It is understood that there has been heartburn within the banking industry over the move to sign MoUs against which the Government has said that it would assess the performance of the chief executives. Bankers feel that the signing of MoUs runs contrary to the Government's moves to grant more managerial autonomy. While the PSBs were given freedom on a number of operational parameters through a managerial autonomy package announced earlier this year, the Government has promised them more freedom in the days to come.

The proposed MoU format entails banks giving annual commitments on financial parameters such as return on average assets, return on average net worth, capital adequacy ratio, net interest margin, cost to income ratio and profit after tax.

On the non-financial qualitative front, the parameters include compliance with Basel-II norms, improvement in risk management practices and product innovation.

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