Indradhanush can be a game-changer for PSU banks: Crisil
The focus on capital efficiency rather than business growth marks a paradigm shift, says the report
Mumbai: The government’s plan to revamp public sector banks, announced on Friday, could be a game-changer and will help banks address problems impacting their performance including governance, accountability and capitalisation, said rating agency Crisil in a report on Sunday.
The focus on capital efficiency rather than business growth marks a paradigm shift, said Crisil, while adding that success of the plan will depend on “relentless implementation".
Under a plan called ‘Indradhanush’ announced on Friday, the government outlined the structure of a seven-member Bank Board Bureau that will oversee the appointments process at public sector banks and provide advisory services. This could be a precursor to setting up a bank holding company that will be the repository of government stakes in state-run banks.
The government also said banks will be given the flexibility to hire permanent staff at the middle management level, and announced the appointment of chief executive officers (CEOs) for five state-run banks, hiring two from the private sector. Details of capital infusion into individual banks were also announced ₹ 20,000 crore would be released for capital needs for the current year shortly, the government said.
“Indradhanush makes a realistic assessment of the capital needs of public sector banks, but it is highly dependent on the market for raising the money. This means banks will have to gain the market’s confidence by materially improving performance, which, in turn, will be a slow, multi-year process," said Pawan Agrawal, chief analytical officer, Crisil Ratings.
The proposals can help public sector banks effectively deal with the malaise of non-performance assets (NPAs), and potentially grow faster than our earlier estimate of 12% annually till fiscal 2019, said the rating agency.
Crisil, however, said that a surgical response to the problem of bad loans was needed, perhaps through the creating of a “bad bank" which holds stressed assets.
The Reserve Bank of India (RBI) has predicted that gross NPAs in the banking system are likely to increase to 4.8% by end September, from 4.6% in March, before improving to 4.7% by March 2016.
Crisil notes that the clear timeline given for the setting up of a Bank Board Bureau and the announcement inducting professionals as non-executive chairmen will help improve governance in state-run banks.
“...allowing bonus and stock options for senior management will make public sector banks competitive and go a long way in attracting right talent," said the rating agency.
As part of appointments announced on Friday, the government tapped private sector professionals for top posts.
P.S. Jayakumar has been appointed the managing director and CEO of Bank of Baroda. Rakesh Sharma will be at the helm of Canara Bank. Jayakumar, a former Citigroup Inc. executive, has been managing director of Value and Budget Housing Corp. Pvt. Ltd. Sharma has been heading Lakshmi Vilas Bank Ltd.
For filling up posts of non-executive chairmen, the government has chosen Ravi Venkatesan, an independent director on Infosys Ltd’s board, for Bank of Baroda; G. Padmanabhan, former executive director at RBI, for Bank of India; and T.N. Manoharan, known for his role in the turnaround at Mahindra Satyam, for Canara Bank.
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