In an effort to breathe new life into public sector banks, the government has announced a seven-pronged strategy, called Indradhanush, to tackle challenges in the sector. Among other things it will involve appointing private sector professionals to lead these institutions, recapitalising the banks and destressing them.

Sharing details of the strategy, touted as the most comprehensive reform since Indira Gandhi nationalised private banks in 1970, Finance Minister Arun Jaitley acknowledged that a “challenging situation does exist, but there is no cause for panic or pressing the alarm button”.

Jaitley was making an obvious reference to the high bad debts and lower profit margins of PSBs, besides the need for more support from the government.

Though the reform measures were announced after trading hours, the market appears to have got an inkling of the development as all PSB stocks closed with handsome gains.

Addressing the media, Jaitley said the measures include appointing people from the private sector to head PSBs, for the first time. Accordingly, 53-year-old P S Jayakumar, Managing Director & CEO, Value Home Private Ltd, has been appointed as the new chief of Bank of Baroda. Similarly, Rakesh Sharma Managing Director & CEO of Laxmi Vilas Bank will head Canara Bank.

The appointments are subject to the outcome of a writ petition filed in the Supreme Court.

The government has also made three other appointments at the MD & CEO level and five at the non-executive Chairman level. In the wake of the Syndicate Bank bribery case, the posts of Chairman and Managing Director had been separated.

Bank Board Bureau As a first step towards setting up a bank holding company, the government has announced the setting up of a Bank Board Bureau (BBB) that will be operational from April 1, 2016. A Budget announcement, the Bureau will replace the Appointment Board of Banks. The Bureau will engage with the boards of various banks to formulate appropriate strategies for their growth and development. “It is an interim arrangement towards setting up a bank holding company,” said Jaitley. Government holdings in PSBs will be transferred into this. Subsequently, the company will raise money to provide additional capital to banks. He said the Bureau will take over supervisory activities.

Jaitley, however, clarified that there will be no conflict with the Reserve Bank of India as the proposed structure will take over only the government’s role as principal shareholder.

While there will be greater flexibility in hiring, banks will not be able to go for direct campus placements from IITs or IIMs due to legal hurdles. They will be empowered to make middle-level appointments.

There will also be a new framework of key performance Indicators. These indicators will include efficiency of capital use, diversification of business, NPA management and financial inclusion. A higher index will lead to a higher performance bonus for MDs & CEOs. The Government is also considering ESoPs for the top management of PSBs.

Tackling bad debts To help banks tackle bad debts, the Centre has come out with a de-stressing plan. Jaitley said five sectors: steel, power, highways, power distribution utilities and sugar (to an extent) are responsible for most bad debts.

Jaitley said that situation in the highways sector is improving while steps are being taken for the steel sector. A package (soft loan of ₹6,000 crore) for the sugar sector has also been announced. He made it clear that “banks cannot support discoms (power distribution utilities) indefinitely”.

Related Topics
comment COMMENT NOW