Govt revamps PSU banks: Appoints new heads, infuses capital
On the eve of the Independence Day, the government brought out the heavy artillery against its banks’ enemy number one -- bad loans. Five of them, which had been headless, got their chief executives, two of them crossing over from the private sector. All state-owned banks stand to get an infusion of capital and the government’s support in tackling sectors that create most of the bad loans.business Updated: Aug 15, 2015 00:54 IST
On the eve of the Independence Day, the government brought out the heavy artillery against its banks’ enemy number one -- bad loans. Five of them, which had been headless, got their chief executives, two of them crossing over from the private sector. All state-owned banks stand to get an infusion of capital and the government’s support in tackling sectors that create most of the bad loans.
To top it all, finance minister Arun Jaitley iterated the promise of independence from political interference made by Prime Minister Narendra Modi at the Gyan Sangam in Pune in January this year.
To prove the old adage, none of this is free lunch. As Jaitley came out to address journalists at the National Media Centre — flanked by minister of state for finance Jayant Sinha, financial services secretary Hasmukh Adhia, and chief economic adviser Arvind Subramanian — he laced the announcement of programme ‘Indradhanush’ with caveats.
“Today we will launch a plan where each bank will be monitored on the basis of KPIs (key performance indicators),” said Jaitley. Sinha said called it a “bottoms-up transformation process” that will push banks to operate only on commercial logic.
Bad loans — which also go by the name of non-performing assets (NPA) or stressed assets — have been plaguing public sector banks for a while. The results declared by them for the first quarter of 2015-16 showed the problem could not be ignored any longer. Several of these banks reported sharp drops in their profits, one by as much as 84%.
Steel, power, road and sugar sectors are being seen responsible for much of the bad loans problem. “There is a need to deal with the issues in these sectors,” Jaitley said, adding that some steps had been taken for steel and sugar. Power distribution companies are being watched closely.
“These steps are likely to alter the banking landscape,” said Arundhati Bhattacharya, chairman of the State Bank of India, the largest of them all.
The government has increased the recapitalisation amount for banks to Rs 25,000 crore for the current financial year from the Rs 7,940 crore announced in the Budget. This money will come to the aide of the banks depending on the improvements they show on parameters divided into two categories: quantitative and qualitative. The quantitative ones – efficiency of capital, NPA reduction, financial inclusion and business diversification — carry 80% weight and the qualitative ones — strategic initiatives, improvement in credit rating, efforts made to conserve capital and human resource initiatives — 20% .
A Bank Board Bureau, to be operational by April next year, will monitor the banks. It will have a chairman and six other members, of which three will be from the private sector. Eventually this bureau will morph into a government-owned holding company.