Mission Indradhanush for Banks
Mission Indradhanush is a 7 pronged plan launched by Government of India to resolve issues faced by Public Sector banks. It aims to revamp their functioning to enable them to compete with Private Sector banks.
Problems faced by Indian banks
- According to Economic Survey 2015, Indian banks face problems on both the policy and structural sides.
- Policy issues- Banks face what has been termed as ‘double financial repression’- issues with policies of Statuary Liquidity Ratio and Private Sector Lending policies
- Structural issues- Governance issues, rising stressed assets (Non- Performing Assets) and lack of diverse funding sources for infrastructure
Problem of NPAs
- high percentage of NPAs in bank due to following reasons
- overleveraged balance sheets- overenthusiastic borrowing and lending
- stalled projects leading to stressed assets for banks
- faulty reporting mechanisms leading to worsening of situation before NPAs are reported
- nexus between bankers and corporates- deliberate defaulting
- ways out
- Government has allowed loans to be converted into equity
- better reporting mechanisms for stressed assets leading to early detection and resolution
- re-capitalisation of banks in short term but within a transparent framework
- recovery of companies and writing off of bad loans to be done checking financial viability of companies and after ensuring efficient corporate governance
- stalled projects- can be tackled via re-negotiation; removal of bottlenecks; ensuring better financial viability of projects; long-term-development of a corporate bond market
Components of Mission Indradhanush
- Mission Indradhanush is a 7-pronged plan to address the challenges faced by public sector banks (PSBs). Many of the measures taken were suggested by P J Nayak committee on Banking sector reforms as indicated.
- The 7 parts include appointments, Banks board bureau, capitalisation, de-stressing, empowerment, framework of accountability and governance reforms (ABCDEFG)
- Appointments - separation of posts of CEO and MD to check excess concentration of power and smoothen the functioning of banks; also induction of talent from private sector ( recommendation of P J Nayak Committee)
- Bank Boards Bureau - will replace the appointments board of PSBs.
- It will advise the banks on how to raise funds and how to go ahead with mergers and acquisitions.
- It will also hold bad assets of public sector banks.
- It will be a step into eventual transition of the bureau into a bank holding company. It will separate the functioning of the banks from the government by acting as a middle link.
- The bureau will have three ex-officio members and three expert members, in addition to the Chairman.
- Capitalisation of the banks by inducing Rs 70,000 crore into the banks in the next 4 years
- Banks are in need of capitalisation due to high NPAs and due to need to meet the new BASEL- III norms
- Solve issues in the infrastructure sector to check the problem of stressed assets in banks
- Greater autonomy for banks; more flexibility for hiring manpower
- Framework of accountability
- The banks will be assessed on the basis of new key performance indicators. These quantitative parameters such as NPA management, return on capital, growth and diversification of business and financial inclusion as well as qualitative parameters such as human resource initiatives and strategic steps to improve assets quality.
- Governance Reforms
- GyanSangam conferences between government officials and bankers for resolving issues in banking sector and chalking out future policy.
An assessment and success so far
- The key performance indicators devised for PSBs if implemented well would establish a credible system of holding PSBs accountable just like present in any MNC or private sector organisation.
- Mission Indradhanush focuses on setting up a transparent a quick-paced hiring mechanism which can allow smooth functioning of the PSB.
- Opening up the top positions in PSBs to private sector candidates can bring in the much-needed fresh outlook
- De- stressing bank assets is very much needed in view of the rising NPAs
- Bank Board Bureau has been formed with former Comptroller and Auditor-General of India Vinod Rai as its first Chairman
- It will select the heads of public sector banks (even from the private sector, if need be) and aid them in formulating strategies to raise additional capital. It will select and appoint non-executive chairmen and non-official directors.
Way ahead- issues and challenges
- A Comparison with recommendations of P J Nayak Committee report suggests that the extent of capitalisation into the public sector banks is not sufficient to overcome the problem of NPAs and to achieve Basel –III levels of tier-I capital.
- The measures involved in Mission Indradhanush have already been around for some time. Thus, the real reform would be in proper implementation of the suggested measures.