Photo: Hemant Mishra/Mint
Photo: Hemant Mishra/Mint

Bank recap plan Indradhanush failed to meet objectives, says India Ratings

  • The Indradhanush plan was announced in August 2015 to help turnaround public sector banks
  • India Ratings believes that unless structural changes are implemented, the requirement for capital infusion is likely to continue

The government’s bank recapitalization programme — Indradhanush – has failed to meet desired objectives, said a report by India Ratings and Research.

The report said that while the scheme envisaged to recapitalise banks based on their performance and its ability to support credit expansion, in reality the capital infused was largely consumed to tide over losses resulting from provisions required for non-performing assets (NPAs). The Indradhanush plan was announced in August 2015 to help turnaround public sector banks.

The credit rating agency believes that unless structural changes are implemented, the requirement for capital infusion is likely to continue even though the quantum required may be lower. This is because large part of the current stress in the balance sheets of PSBs has already been recognised and provided for.

According to India Ratings and Research, one of the structural changes could be an increase in the tenure and prevention of frequent changes in senior management team of PSBs as this does not allow for continuity in management policies and reduces accountability.

Other changes could include variable compensation and employee stock options to directly link the performance of the bank with the performance of the management team; allowing appointment of candidates from the private sector and improving governance and increase independence of the board.

The report also said that public sector banks have lagged on the value creation front. Since FY14, the government and LIC has infused 3 trillion in PSBs with additional 70,000 crore planned in FY20.

“However, from the value creation objective, the scenario looks weak. The current market value as on 29 July, 2019 of government and LIC’s stake was 4.4 trillion (FY14 at about 2.2 trillion). The increase in market capitalisation over FY14 is significantly lower than the capital infused," it said.

The report said that recapitalisation is a prompt response to infuse funds in cash-strapped banks. The capital infusion by the government in PSBs may ensure banks’ solvency but may not necessarily ensure stability and growth in the absence of non-financial and structural reforms, it added.

“Although the government support will help PSBs build their capital and buffers against losses, the improvements are likely to be only temporary; capital requirements may arise again in the next stress cycle," India Ratings and Research said.

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