Will Indradhanush Achieve Its Objective Of Revamping PSU Banks? Over the last few years, asset quality of banks in India has come under tremendous pressure; more so of the public sector banks. Until the last financial year (i.e. FY14) gross Non-Preforming Assets (NPA's) of banks touched 4.1% (up from 3.6% in FY13) and this financial year too, the pressure may persist. Tough economic conditions and higher interest rates have weighed in, resulting in the slippage of the quality of assets of Indian banks. Moreover, lapse in risk management processes is also responsible for the poor asset quality of banks.

The Government and RBI have been trying to palliate problems of Public Sector Undertaking (PSU) banks. The Department of financial Services under the ministry of finance recently launched an initiative tagged as Indradhanush which would incorporate a seven pronged approach to revive the asset quality of PSU banks, raise the bar for corporate governance and accelerate their growth rate.

So what changes has the Government proposed?

1. Appointments: The Government decided to separate the post of Chairman and Managing Director by prescribing that in the subsequent vacancies to be filled up the CEO will get the designation of MD & CEO and there would be another person who would be appointed as non-Executive Chairman of PSBs.
   
   
2. Bank Board Bureau: The Bank Board Bureau (BBB) will be a body of eminent professionals and officials, which will replace the Appointments Board for appointment of Whole-time Directors as well as non-Executive Chairman of PSBs. They will also constantly engage with the Board of Directors of all the PSBs to formulate appropriate strategies for their growth and development.
   
   
3. Capitalization: the Government of India wants to adequately capitalize all the banks to keep a safe buffer over and above the minimum norms of Basel III. Hence the Government has decided to infuse over Rs 70,000 crore spread out over the next four years. For Financial Year 2015 -16 Rs 20,088 crore will be infused into 13 PSU banks within a month's time with country's largest lender SBI garnering Rs 5,531 crore. The remaining Rs 5000 crore will be decided only in the fourth quarter of FY16 after looking at the performance of various banks in the first nine months of FY 2015 - 2016.
   
   
4. For reducing the NPA's of banks:-
   
   
   1. De-stressing PSBs: The infrastructure sector and core sector have been the major recipients of PSBs' funding during the past decades. But due to several factors, projects are becoming increasingly stalled / stressed thus leading to NPA burden on banks. In a recent review, problems causing stress in the power, steel and road sectors were examined. A meeting was held on April 28, 2015 at Mumbai first with all the banks and concerned Ministries to understand the problems for each sector. Various solutions were arrived at for eliminating impediments for each sector.
      
      
   2. Strengthening Risk Control measures and NPA Disclosures: The RBI has come up with a few measures and guidelines to strength risk control measures and NPA disclosures. The measures introduced by the RBI will help in:
      
      
   • Early recognition of financial distress, prompt steps for resolution and fair recovery for lenders.
   • On the asset side, banks will be encouraged to extend long term loans to infrastructure sector with flexible structuring to absorb potential adverse contingencies
   • New category of borrower called Non-Cooperative borrower. A non-cooperative borrower is a borrower who does not provide information on its finances to the banks. Banks will have to do higher provisioning if they give fresh loan to such a borrower.
   • RBI has tightened the norms for Asset Reconstruction Companies (ARCs)
     
     
   The Government has also decided to establish six new Debt Recovery Tribunals (DRT) (at Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri, Hyderabad) to speed up the recovery of bad loans of the banking sector.
   
   
5. Empowerment: The Government has issued a circular that there will be no interference from Government and Banks are encouraged to take their decision independently keeping the commercial interest of the organisation in mind. However, banks will have to be more accountable as they will enjoy autonomy. For this, banks have been asked to build robust grievances redressal mechanism for customers as well as staff so that concerns of the affected are addressed effectively in time bound manner.
   
   
6. Framework of Accountability: The Government had made changes to the method of measurement of performance of PSU banks. Some other measures were also introduced such as laying down strict timelines for filing of complaints of fraud cases with CBI and Streamlining vigilance process for quick action for major frauds.
   
   
7. Governance Reforms: The process of governance reforms started with "Gyan Sangam" - a conclave of PSBs and FIs organized at the beginning of 2015 in Pune which was attended by all stake-holders including Prime Minister, Finance Minister, MoS (Finance), Governor, RBI and CMDs of all PSBs and FIs. There was focus group discussion on six different topics which resulted in specific decisions on optimizing capital, digitizing processes, strengthening risk management, improving managerial performance and financial inclusion.
   
   

Will these changes impact the performance of PSU banks?

PersonalFN is of the view that, the reforms introduced by the Government are likely to alleviate the stress faced by PSU banks. These measures may also help banks get out of mired situation.

Having said this, Indradhanush falls short of addressing a few critical areas of banking. It provides no remedy to problems pertaining to human resource management at the mid-level. Furthermore, looking at the quantum of bad assets that prevail today, strategy suggested under Indradhanush may not change the situation drastically in foreseeable future.

PersonalFN also believes the success of entire programme depends largely on the timely and rigorous implementation of strategies. Political interference in the banking business has to go down significantly for banks to enjoy autonomy in true sense and score well on quantitative and qualitative parameters set for the measurement of their performance. Nonetheless, the initiative taken by the Government may be a first step in making PSU banks more professional and thus effective.

Impact on banking stocks and mutual funds investing in banking sector…

According to The Economic Times, dated August 17, 2015, 15 PSU bank stocks have corrected between 15% - 50 % over the past year against a 25% rise in the BSE's Bankex while the BSE SENSEX has risen over 8% during this period. Data showed that holdings of mutual funds in PSU banks has fallen 1% over the last year from June 2014 to June 2015 while within the last one month (from June to July) itself mutual funds have increased their holdings in PSU bank stocks by 10%.

It seems that Mutual Funds are betting on PSU bank stocks as these new reforms are expected to put the banks back onto their path of growth. However it is yet to be seen if the banks will benefit because of these reforms in any significant way. Growth in the bad assets of PSU banks over the last one year has been a major problem. It is likely that the efforts of the Government and those of RBI to revive growth in PSU banks would bear fruits in the long term.

PersonalFN believes investors should refrain from speculating on the movement of PSU banking stocks. You should avoid investing in sector funds betting on banks, especially the PSU banks. On the contrary you may prefer to invest in consistently performing opportunities funds which may take optimum exposure to these banks after taking into account company specific risk.

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kk25022@gmail.com May 25, 2018 MATA PITA JI KI JAY GOD SE KEYA KAAM HAI USE GORAMENT VAH HAMARE MATA PITA JI KI JAY GOD SE KEYA KAAM HAI USE GORAMENT VAH HAMARE MATA PITA JI KI JAY GOD SE KEYA KAAM HAI USE GORAMENT VAH HAMARE MATA PITA JI KI JAY GOD SE KEYA KAAM HAI USE GORAMENT VAH HAMARE MATA PITA JI KI JAY GOD SE KEYA KAAM HAI USE GORAMENT VAH

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