Indradhanush a ray of hope but public sector banks need wider reforms

The disappointing performance of the public sector banks (PSBs) in the third quarter of FY16 puts the spotlight on the effectiveness of Narendra Modi government's seven pronged strategy Indradhanush, launched with much fanfare in August last year to revamp functioning of the state-run lenders. The measures included recapitalisation, performance-based incentives and professional appointments.

With most PSBs struggling with mounting non-performing assets (NPAs) - mainly from steel, infrastructure and power sector companies - questions are being raised if recapitalisation was sufficient to help PSBs tide over the inherent structural issues.

The seven elements of Indradhanush are - professional appointments, Banks Board Bureau, re-capitalisation, de-stressing, empowerment, framework of accountability and governance reforms.
 

In the third quarter of FY16, PSBs have seen a sharp rise in their NPAs and a decline in net profits. State Bank of India (SBI), the country's larger lender, saw a 62 per cent decline in net profits and fresh slippages worth Rs 20,692 crore during Q3. SBI's gross NPAs crossed five per cent of total loans. Similarly, Punjab National Bank (PNB) posted a 93 per cent decline in net profit in Q3 with NPAs rising to 8.47 per cent of total loans. Oriental Bank of Commerce (OBC) posted a net loss of Rs 424.6 crore in the quarter.

"The balance sheets are speaking for themselves. On the NPA issue, despite RBI putting in place a resolution mechanism, things have not improved since decision making, board processes and legal system are slow. Moreover, discipline around NPA recognition has been an area of improvement forever. Mounting NPAs do not come up overnight," said Shinjini Kumar, leader, banking and capital markets, PwC. The whole culture of wishing bad debts away and keeping them on books is ingrained into the banking system, partially because in the past these strategies have worked when business cycles have turned around, added Kumar.

Under Indradhanush, while the government's promise of recapitalising PSBs over a three-year period seems to be on track, it seems inadequate considering the scale of the stress. Of the Rs 25,000 crore meant for 2015-16, the government has pumped in about Rs 20,000 crore in 13 PSBs so far. The government will infuse another Rs 5,000 crore in the current financial year to strengthen the bank balance sheets. PSBs will get Rs 25,000 crore in the next fiscal, followed by Rs 10,000 crore each in FY18 and FY19.

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INDRADHANUSH SO FAR
The 7-pronged strategy to revamp PSBs

APPOINTMENTS

• No appointment of private sector talent in PSBs, besides Canara Bank and Bank of Baroda

BANKS BOARD BUREAU

• To be functional from April 1, 2016

CAPITALISATION

• Allocation of Rs 20,088 cr so far
• Performance-based allocation of Rs 5,000 cr in March 2016

DE-STRESSING PSBS

• To develop vibrant corp debt market to reduce lending pressure on banks
• Strengthening of asset reconstruction companies

EMPOWERMENT

• Provide greater flexibility in hiring manpower to banks

FRAMEWORK OF ACCOUNTABILITY

• Streamlining vigilance process for quick action for major frauds, including connivance of staff

GOVERNANCE REFORMS

• ESOP scheme to be formulated for top management
• Bank holding company
• Other strategic initiatives such as consolidation