Banks' revamp plan well thought out

The government’s newly announced plan to revamp and reform public sector banks (PSBs) is more comprehensive than earlier attempts. Its past efforts had not often gone beyond injecting more capital into the banks. Recently, it had also adopted a policy to appoint outsiders as CEOs of PSBs.

The latest plan, called Indradhanush, takes a wider view and the government claims it will address most of the weaker areas in the functioning of the banks. The seven areas where more action is proposed are appointments, formation of a bank board bureau, capital infusion, improvement in the NPAs, empowerment, accountability and governance. Only if effective steps are taken on all these fronts can the public sector banks be made to turn the corner. The new plan is in line with some of the recommendations made by the P J Nayak committee appointed by the RBI to suggest ways to reform the public sector banks.

According to the plan, though all the banks will be eligible for capital replenishment, a part of the alloca-tion will be made on the basis of financial performance. This is welcome because till now, much of the money that the government gave to the banks has only gone down the drain without any corresponding responsibility on their part to show that it has been well utilised. The establishment of a Bank Board Bureau, which will appoint the board of governors, may ideally help reduce government interference in the working of the banks. But its composition is government heavy. In due course, a holding company which will hold the government’s stake in banks is to be set up. The NPA problem, which has hit the balance sheets of all PSBs, is proposed to be addressed through an institutional mechanism.

Even assuming that the package will be implemented well, it may be considered only a first step in the reform process. If the government’s role in the management of banks should be reduced, the package should go further. Will the government be ready for this and allow the banks to function commercially? It should be noted that there is no mention of disinvestment in the new plan. The government also seems to have developed second thoughts about bringing in managerial expertise from outside. The proposed quantum of capital infusion will be inadequate. There should also be an active policy of consolidation, because some of the weaker banks may be able to survive only if they are merged with bigger and smaller banks. The bank board bureau may have to take the initiative for this. The package has been generally well received but its results will depend on many ifs.