Govt may bind banks to target

Bosses accountable for business yardsticks.

In a move that will bind banks to set business targets in the beginning of the year, Finance Minister P Chidambaram will discuss a proposal of putting in place a system of memorandums of understanding (MoUs) to be signed between individual banks and the banking division of the finance ministry.

Finance ministry officials told Business Standard that banks would not only have to set profit and business growth targets based on their performance during the previous year but also bind themselves to targets on the quality of assets and reduction of non-performing assets.

The finance ministry proposes to review the performance parameters every six months and the heads of the banks that have not met the targets will have to answer for missing the targets.

"We may even consider moving bank chiefs and executive directors who have not met the target to some other bank," said an official. In other words, non-performers will be penalised by the owner.

Finance ministry officials said while framing the autonomy guidelines for nationalised banks earlier this year, the Centre had retained the right to appoint bank chairmen, executive directors and government nominees, besides monitoring their performance in its capacity as the largest shareholder. "This is a move aimed at better monitoring of the banks," an official said.

The proposal for banks is quite similar to the system practised in public sector companies, which sign MoUs with the departments concerned.

A similar system for banks was in vogue in the late 1980s when RN Malhotra was the governor of the Reserve Bank of India. At that time, banks were required to submit two-year plans to the RBI, which was reviewed by the governor every quarter. The move was discontinued when C Rangarajan took over.

In the early 1990s, banks were forced to sign MoUs with the RBI as a pre-condition to receiving recapitalisation bonds to bolster their capital adequacy ratios.

Following the introduction of prudential norms, most public sector banks had to make huge provisioning to bring down their non-performing assets. In the process, the capital of most of the banks got eroded bringing down their capital adequacy ratios.

The government pumped over Rs 20,000 crore into the system to shore up PSU banks' capital base. As a precondition to receiving the recap bonds, the banks were forced to sign the MoUs with the regulator committing to close down and merge unviable branches, growth in low cost deposit mobilisation and advances and ensuring higher profitability.

The Centre pumped in Rs 20, 446 crore in public sector banks between 1985-86 and 2001-02 which were invested by the banks in recap bonds. In the last three financial years, Rs 609.96 crore has been returned by banks which had tapped the market.

CONSOLIDATION AGENDA

Consolidation among nationalised banks may have been put on the backburner in the wake of opposition from the Left parties, but the finance ministry wants to keep the issue alive.

Finance Minister P Chidambaram will discuss the need for consolidation and the steps taken by banks in this direction during his meeting with bank chiefs on Friday.

He is also slated to discuss ways to bring about convergence in the financial sector with banks entering other businesses like insurance and mutual funds.