Govt sets cost-cutting targets for 10 PSU banks before capital infusion
The 10 public sector banks including IDBI Bank, Indian Overseas Bank, UCO Bank and Bank of India have been hit the hardest by mounting bad loans
The finance ministry has laid down specific targets that 10 weak public sector banks must meet to be eligible for further capital infusion.
In a letter to these banks, the department of financial services (DFS) said the lenders would have to lower expenses, excluding salaries, by at least 25% over the next three years.
The banks were told to go slow on employee addition and branch expansion during this period, shut down loss-making domestic and overseas branches and ATMs, and outsource recruitments of staff including security guards. Mint has reviewed a copy of the letter, which was attached to a communication sent by Kolkata-based Uco Bank to its unions.
The letter comes ahead of a meeting of bank officials on Wednesday with the DFS when some of the lenders will submit their turnaround plans.
Banks have been working with SBI Capital Markets Ltd to design a detailed bank-wise plan based on which a tripartite agreement between the government, bank management and employees of the bank will commit the lenders to the stringent targets.
Last month, the unions signed a memorandum of understanding (MoU) with the managements, agreeing to the conditions that the government has set, based on which the government released the final tranche of capital allocated for FY17.
Among the public sector banks, the 10 banks including IDBI Bank, Indian Overseas Bank, UCO Bank and Bank of India have been hit the hardest by mounting bad loans that have eroded profitability.
The ministry has set stringent targets for banks which need to be met at the branch level. This includes bringing down gross non-performing assets (NPAs) by at least 10% year-on-year and net NPAs by 0.5% every quarter. Banks also need to look at upgrading at least 15% of gross NPAs year-on-year and cash recovery from written-off accounts of at least 10%.
“More focus to be put on quality of advances. It is observed that NPAs in corporate loans are higher and consequently efforts should be made to avoid lending to unrated/less than BBB-rated corporates,” said the letter.
According to the Reserve Bank of India’s December 2016 Financial Stability Report, 88% of the Rs8.3 trillion in stressed loans are owed by large borrowers. Keeping this in mind, the ministry has asked banks to increase the proportion of loans under Rs5 crore to 50% of total advances in the next three years. Banks will also need to give details of branch-level targets in terms of advances and also how they will monitor these targets.
“Many banks have already submitted their turnaround plans,” said the chief of a public sector bank on condition of anonymity, adding that the finance ministry had imposed some strict standards because they did not meet its expectations. “The ministry is yet to give its final approval to our turnaround plans submitted.”
The conditions imposed by the government will form part of a time-bound plan beginning in the current fiscal year that will decide the future of the government’s capital infusion programme.
Last July, the government announced that it would infuse Rs22,915 crore (out of the Rs25,000 crore earmarked for 2016-17) in 13 state-owned banks. At that time, it said it would release 75% of the earmarked funds immediately and link the remaining to the banks’ performance.
Under its so-called Indradhanush programme, the government will infuse Rs70,000 crore in state-owned banks over four years while they will have to raise a further Rs1.1 trillion from the markets to meet their capital requirements in line with global Basel III risk norms.
Public sector banks were to get Rs25,000 crore each in 2015-16 and 2016-17. Besides, Rs10,000 crore each would be infused in 2017-18 and 2018-19. In his budget speech on 1 February, finance minister Arun Jaitley announced a capital infusion of Rs10,000 crore in 2017-18.