The Centre has hit the ground running on revamping public sector banks (PSBs) by unveiling a seven pronged Indradhanush plan, according to credit rating agency Crisil.
The comprehensive framework for improving public PSBs performance is based on seven prongs — appointments, bank board bureau, capitalisation, de-stressing PSBs, empowerment, framework of accountability and governance reforms.
Pointing out that Indradhanush can be a game-changer, Crisil said in a statement said that its focus on capital efficiency rather than business growth marks a paradigm shift. “Success, however, will depend on relentless implementation, and staying the course no matter the obstacles. What’s encouraging is that the government has hit the ground running,” said the rating agency.
Crisil observed that the Indradhanush proposals can help PSBs effectively deal with the malaise of non-performing assets (NPAs). These banks can potentially grow faster than its earlier estimate of 12 per cent annually till fiscal 2019.
Pawan Agrawal, Chief Analytical Officer, Crisil Ratings, said: “Indradhanush makes a realistic assessment of the capital needs of public sector banks, but it is highly dependent on the market for raising the money.
Slow process
“This means banks will have to gain the market’s confidence by materially improving performance, which, in turn, will be a slow, multi-year process.”
Crisil believes three more steps could have helped build additional confidence — a ‘surgical’ response to the challenge of NPAs by creating a ‘bad bank’; signalling the government’s determination to change the game through a disproportionately higher upfront capital infusion; and addressing emerging human resources challenges at the mid-to-senior level.
Conceptually, Indradhanush takes cognisance of both internal and external factors that influence the performance of PSBs, it said.
Crisil further said the clear timeline given for the setting up of a Bank Board Bureau and the announcement inducting professionals as non-executive chairmen will eventually drive qualitative changes in governance, strategy formulation, capital efficiency, and human resource practices. And allowing bonus and stock options for senior management will make PSBs competitive and go a long way in attracting right talent.
The agency also said the plan to provide a clear roadmap on capital infusion by the government and maintaining a capital buffer beyond the regulatory minimum reinforces its stance that the credit ratings of public sector banks will remain in the ‘high safety’ category in the foreseeable future.
End of uncertainty
Meanwhile, Ananda Bhoumik, Managing Director & Chief Analytical Officer, India Ratings & Research, said most PSBs will be relieved at the apparent end to uncertainty on the government’s (capital) contribution.
However, banks will need to raise an additional ₹15,000 crore from the equity market together with ₹40,000 crores AT (additional tier) 1 bonds during the year.
In addition, Ind-Ra’s research suggests provisioning gap due to over-leverage in distressed corporates, which may need to be filled in by equity. It is therefore imperative for government banks to improve performance and market valuations, it said.