Banking Reforms – An analytical perspective

09 Jul Banking Reforms – An analytical perspective

Posted at 09 Jul 2022 in Current Affairs, GS Paper III by vikas gupta 0 Comments

0 Likes

A good banking system means a good working economy. However, it has been suggested that control of the government has been a ban in the banking system. Historically, government has been sanctioning loans as per the linkage on personal repo.

J. Nayak Committee on governance in PSU banks:

Bank Investment Company or BIC:
- It will hold the govt. shares in PSBs.
- Monitor the performance of PSBs and make suggestions.
- Acts as a buffer between PSBs and the government.
- Help the PSBs to raise additional capital.

Indradhanush Scheme 2015:

Appointments: The Government has decided to separate the post of Chairman/CEO and Managing Director. Private sector candidates can also apply for the position of MD & CEO.
Bank Board Bureau (BBB): It is a 7-member body, which will replace the Appointments Board for recommendation of appointment of whole-time Directors as well as non-Executive Chairman of PSBs. It would also act as the watchdog for PSBs’ performance. This is also the first step towards a banking investment company. The Ministry of Finance takes the final decision on the appointments in consultation with the Prime Minister’s Office.
Capitalization: The government has announced to infuse Rs 70,000 crore in state-run banks over four years while they will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirement in line with global risk norms, known as Basel-III.
Distressing: reducing Bad loans or NPA.
Empowerment: The government will strive to make it easier for PSBs to hire. Currently, PSBs have all the freedom to recruit at middle level and on contractual basis. They also want campus hiring, but there are some legal difficulties in that. The government is also looking at introducing Employee Stock Ownership Plan (ESOPs) for the PSU bank managements.
Framework of accountability: A new framework of Key Performance Indicators (KPIs) to measure the performance of PSBs is being announced. For example, capital ratios (CRAR-Capital to Risk weighted Assets Ratio/Common Equity Tier I ratio), Asset Quality (Net NPA ratio) etc.

Governance reforms: Banks have been assured of “no interference policy”, but at the same time asking them to have robust grievance redressal mechanism for borrowers, depositors as well as staff.

Analysis:

Crisil:

It is a step forward but the implementation is still a cause to worry.
The capital infusion of public sector banks is dependent on the market and performance of banks, which, in turn, will be a slow, multi-year process.

CAG report:

The Centre’s ‘Indradhanush’ scheme to recapitalise public sector banks (PSBs) based on their performance was not followed during disbursal of funds.
Also, some banks that did not qualify for additional capital as per the decided norms, were infused with capital, and in some cases, banks were infused with more capital than required.
Most of the capital infused was consumed to tide over NPAs.

Comparison with private banks:
- Nayak committee has said that the pvt. banks do better when it comes to independent directors but the argument is flawed as their directors are usually appointed by the promoter or major shareholder. While govt. appointed director is not beholden by the CEO so he is still relatively independent.

Financial Services Institutions Bureau (FSIB):

The government has transformed Banks Board Bureau (BBB) into Financial Services Institutions Bureau (FSIB) by making some amendments.

It will offer suggestions for the non-executive chairman of banks and other financial institutions as well as for the selection of full-time directors.
It provides criteria for choosing the general managers and directors of general insurance businesses in the public sector.

Rationale of the change:

Last year, the Delhi High Court stated that the bureau lacked the authority to suggest appointments at PSU general insurers.
Despite the BBB’s excellent work, recruitment at a higher level has been sluggish, necessitating an overhaul. Additionally, BBB’s extended two-year tenure came to an end, and new hiring will only resume after a new body has been established.

Thus, there has been attempts to brings changes in the banking system in India, which will try to reform the issues. However as highlighted by the CAG report it is still a very long story.