Initiatives to improve Banks
Over the last four Financial Years, the Government of India has taken comprehensive steps to strengthen the Public Sector Banks (PSBs), under Government’s 4R’s strategy of recognising NPAs transparently, resolving and recovering value from Stressed Accounts through clean and effective laws and processes, recapitalising banks, and reforming banks through the PSB Reforms Agenda.
Under recapitalisation, over the last three Financial Years, PSBs have been recapitalised to the extent of Rs. 2.87 lakh crore, with infusion of Rs. 2.20 lakh crore by the Government and mobilisation of over Rs. 0.66 lakh crore by PSBs themselves. Details of capital infused in PSBs by the Government are at Annex. Besides recapitalisation, other steps taken by the Government to improve the condition of banks include, inter alia, the following:
i. Change in credit culture with institution of Insolvency and Bankruptcy Code (IBC) fundamentally changing the creditor-borrower relationship, taking away control of the defaulting company from promoters/owners and debarring wilful defaulters from the resolution process and debarring them from raising funds from the market.
ii. Fugitive Economic Offenders Act, 2018 has been enacted to enable confiscation of fugitive economic offenders’ property. iii. Heads of PSBs have been empowered to request for issuance of look-out circulars.
iv. National Financial Reporting Authority has been established as an independent regulator for enforcing auditing standards and ensuring audit quality.
v. Key reforms have been instituted in PSBs, including the following: a. To ensure proper due diligence in project financing, Board-approved Loan Policies of PSBs now mandate tying up necessary clearances/approvals and linkages before disbursement, scrutiny of group balance-sheet and ring-fencing of cash flows, and appraised of non-fund and tail risk.
b. For mitigating risk on account of misrepresentation and fraud, use of third-party data sources for comprehensive due diligence across data sources has been instituted. c. For clean and effective monitoring, monitoring roles have been strictly segregated from sanctioning roles in high-value loans, and specialised monitoring agencies combining financial and domain knowledge have been deployed for effective monitoring of loans above Rs. 250 crore.
d. To ensure timely and better realisation in One-Time Settlements (OTSs), online end-to-end OTS platforms have been set up. e. For faster processing of loan proposals, Loan Management Systems have been put in place for personal segment and MSME loans.
vi. To strengthen governance at the Board level, the position of Chairman and Managing Director (CMD) has been bifurcated into separate positions of a Non-executive Chairman and a Managing Director (MD) and Chief Executive Officer (CEO). vii. A professional Banks Board Bureau (BBB) has been created for arm’s length selection of non-executive Chairmen and whole-time directors.
Positive impact on PSBs of Government’s 4R’s approach is now visible and is reflected, inter-alia¸ in the following:
i. Robust recovery of Rs. 3.59 lakh crore has been effected over the last four years, including record recovery of Rs 1.23 lakh crore in financial year (FY) 2018-19.
ii. Asset quality has greatly improved, which is reflected in 45% year-on-year reduction in slippage into non-performing assets (NPAs) in FY 2018-19, and 63% reduction in 31 to 90 days overdue corporate accounts by March 2019 from their peak level in June 2017.
iii. With stress recognition largely completed, significant headway in recovery and resolution under IBC, and reduced slippages as a result of improved underwriting and monitoring, gross NPAs of PSBs have started declining, after peaking in March 2018, registering a decline of Rs. 89,189 crore from Rs. 8.96 lakh crore in March 2018 to Rs 8.06 lakh crore in March 2019.
iv. With substantial cleaning up accompanied by recapitalisation of banks, credit growth of PSBs has picked up substantially, from 0.78% year-on-year in FY 2016-17 to 7.51% in FY 2018-19.
By addressing the underlying causes behind the build-up of stress in PSBs through comprehensive reform to change credit culture and tighten discipline for stakeholders across the financial system, institutionalisation of robust underwriting and monitoring, fundamental governance reforms, and leveraging of the transformation potential of technology, the risk of recurrence of excessive stress in PSBs has been considerably minimised and PSBs have emerged stronger.
Note: In the reply, the figures for PSBs include those for IDBI Bank Limited, which has been recategorised by RBI as a private sector bank with effect from 21.1.2019. This was stated by the Union Minister of Finance & Corporate Affairs, Smt. Nirmala Sitharaman in a written reply to a Parliament.
