Sunday, August 16, 2015

More on "Indradhanush"

The ambitious policy designed by Department of Financial Services in the Ministry of Finance to revitalise public sector banks (PSBs) has been named 'Indradhanush' which means 'the rainbow'. Like VIBGYOR, the new policy contains seven colourful parts. It is claimed by the Department that this is the most significant reform in Indian banking after the nationalisation of banks which took place in the year 1969. (The policy wrongly quotes the year as 1970!)

The parts are creatively named in alphabetical order, ABCDEFG. These respectively are Appointments, Bank Board Bureau, Capitalisation, De-stressing PSBs, Empowerment, Framework of Accountability and Governance Reforms.

Appointments: The post of Chairman and Managing Director (CMD) has been split into two, as is the trend globally to promote better governance. The two posts are non-executive Chairman and MD & CEO. Chairman will focus on policy whereas MD & CEO will look after the operations in a bank. The process of selection to these posts has become 'more transparent and meritocratic'.

Bank Board Bureau (BBB): BBB which is likely to be operational by 1st April, 2016 will be in charge of selection of non-executive Chairmen and Executive Directors of PSBs. BBB will engage with PSBs in formulation of growth strategies. This is a new approach and its effectiveness remains to be seen. BBB may enable all PSBs to become one large 'Learning Organisation' if BBB is able to transmit successful strategies from one PSB to another.

Capitalisation: The policy says, "If we exclude the internal profit generation which is going to be available to PSBs (based on the estimate of average profit of the last three years), the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore. This estimate
is based on credit growth rate of 12% for the current year and 12 to 15% for the next three
years depending on the size of the bank and their growth ability. We are also presuming that
the emphasis on PSBs financing will reduce over the years by development of vibrant
corporate debt market and by greater participation of Private Sector Banks."

It is noteworthy that the government hopes for / is reconciled to reducing role of PSBs in future. Government proposes to fund PSBs to the extent of Rs.70,000 crore in the next 4 years including Rs.25,000 crore this financial year itself.

De-stressing PSBs: Finance ministry intends to take more steps, jointly with RBI, to enable PSBs to improve recovery through better monitoring. Government will facilitate early commissioning of infrastructure projects. All these measures will reduce the stress on PSBs. (In a lighter vein, 'De-stressing PSBs' also means giving less importance to PSBs viewed in the light of previous paragraph. A Freudian slip?)

Empowerment: Government has promised to avoid interference in the working of PSBs. PSBs will enjoy full functional freedom. This is a crucial element of policy that will determine the future of PSBs.

Framework of Accountability: A new set of Key Performance Indicators for top management has been announced. There is 80% weightage for quantitative factors and 20% for qualitative ones. ESOPs for top management is under consideration. Intentions are good. Is it possible to prevent window-dressing by banks? Trade unions which are of course losing their strength and perhaps significance too have already questioned why only the top management should get financial incentives.

Governance: More Gyan Sangams will be held. Strategic initiatives like consolidation will be considered.

'Indradhanush' concludes by saying, "The Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort undertaken since banking nationalisation in the year 1970.
Our PSBs are now ready to compete and flourish in a fast-evolving financial services

Finance Ministry has forgotten that banks were nationalised in 1969 and not 1970. 

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