Bank Recapitalisation and Comprehensive Reform Plan

The Government of India on 24th January 2017 has unveiled details of the bank recapitalisation plan for Public Sector Banks (PSBs) announced earlier in October, 2017. The overarching framework for the reforms agenda is “Responsive and Responsible PSBs”.
bank recapitalisation plan
The recap would be accompanied by a strong reforms package across six themes incorporating 30 action points. The reform agenda is aimed at EASE – Enhanced Access and Service Excellence. It will serve as roadmap for new India which make banking business:

  • Clean and Commercially Prudent Business
  • Value for stakeholders
  • Technology driven smart banking
  • Banks with financial stability and improved governance

Themes of the Plan

The reform agenda is focusing on the below six themes:

  • Customer Responsiveness
  • Responsible Banking
  • Credit Off-take
  • UdyamiMitra for MSMEs
  • Deepening Financial Inclusion & Digitalisation
  • Ensuring outcomes – Governance/HR

Thirty Point Action Agenda

The reform plan consists of above mentioned six themes containing 30 action points as described below:

  • Theme 1: Customer Responsiveness
    1. Banking from comfort of home and mobile: The banking should be made hassle free and easy. To address this, the government has proposed to promote digital, integrated mobile apps for:
      • Opening accounts and fixed deposits
      • Nomination
      • Sanction of overdraft facility
      • Online loan application
      • E-payments
    2. Banking-plus services: The banks should provide other services like insurance products and other investment options.
    3. Simplification of forms: The forms used by banks to offer various services like account opening, fixed deposits etc should not be more than pages.
    4. Pleasing ambience of customer service area: To encourage cleanliness drive and Swachh Bharat Abhiyan, the bank branches should provide access to clean toilets and safe drinking water with good hygiene.
    5. Door-step banking: The banks should provide door-step banking for senior citizens and Divyangjans to enable ease of access to banking services.
  • Theme 2: Responsible Banking
    The Government want banks to be vigilant and responsible while doing riskier operation like consortium finance, corporate loans etc. To achieve this, the government has proposed following action points:

    1. Clean consortium loans: The banks are required to minimize exposure to consortium advances to 10% of total exposure and adopt Standard Operating Procedure (SOP) for such finances.
    2. Clean corporate lending: The bad corporate loan has been a reason of headache for most of PSU banks. Therefore the banks should now follow rigorous due diligence, ring-fence cash flows, approvals are tied up before disbursement of corporate loan.
    3. Clean post-sanction follow-up: To ensure proper end use of funds, post rigorous post sanction follow-up in loans above 250 crore should be undertaken. This includes Specialised monitoring agencies and red flag breach of covenants.
    4. Clear Risk Appetite Framework: The risk should be well perceived, factored in and priced. The riskier operations should be priced appropriately.
    5. Clear responsibilities: There must be strict segregation of pre-sanction and post-sanction roles. The responsibilities must be clear and concise.
    6. Stringent recovery follow-up: Establish SAM – migration of stressed assets
    7. Differentiated Banking Strategy – (DBS): Each bank is different from each other in its market segment, therefore there is need of having Differentiated Banking Strategy (DBS) which includes:
      • Leadership in market segments as per core competence
      • There corporate exposure should not be more than 25% as per Bank’s approved DBS
      • Achieve loan portfolio mix – Swap/sell loan assets
      • The support for regulatory capital continues
    8. Non-core assets: The banks need to monetise non-core assets.
    9. Rationalise / Close / Consolidate: The banks should consider rationalise their overseas branches and business units in order to reduce cost of operations.
  • Theme 3: Credit Off-take
    Capital will be pumped-in to enable credit off-take especially for MSMEs.
  • Theme 4: UdyamiMitra for MSMEs
    1. Online Application Facility: The application for credit facilities by MSME must be 100% automated and decision making be tracked online.
    2. Decision in 15 days: The proposal lodged on udyamimitra.com must be decided within 15 days.
    3. Enhanced working capital: The GST registered MSMEs may be provided enhanced working capital as an incentive to get itself registered under GST system.
    4. More push: More push be given to MSME by providing more credit support via MUDRA and Stand Up India.
    5. All PSBs: All Public Sector Banks will be registered on TReDS
    6. Financing and Bill realisation: Financing Bills and its realisation be made easy for MSMEs
    7. Use of FinTech: The financial technology like Big data will be leveraged to analyse through multiple data sources
  • Theme 5: Deepening Financial Inclusion & Digitalisation
    1. Zero liability of customer on fraudulent digital transactions: The disputed amount should be refund within 10 working days
    2. Near-home banking: A banking unit within 5 km of every village
    3. Mobile ATM: A mobile atm in every under-served district
    4. Massive expansion: A massive expansion of micro-insurance products like PMSBY/PMJJBY
    5. GIS-based mapping: All banking outlets will be mapped via GIS.
    6. Ease of Financial Inclusion: Financial inclusion will be made easy via Jan Dhan Darshak App and website findmybank.gov.in
  • Theme 6: Ensuring Compliance —Governance / HR
    1. No interference of Government in commercial operations of banks
    2. Strengthening and empowering the bank boards
    3. Bank Boards to monitor public sector bank reforms agenda quarterly
    4. Assign reforms Theme-wise to PSB Whole Time Directors(WTDs)
    5. Boards to evaluate Whole Time Directors performance As part of KRAs
    6. Incentivise & fast-track top performers through Performance Management Systems
    7. Board-approved strategic vision and Business focus plan

Recapitalisation of Public Sector Banks

In October 2017, the government committed to infuse capital in public sector banks to the tune of Rs. 2 Lakh 11 thousand crores. Keeping its commitment intact, the government decided to infuse capital of around Rs 1 lakh crore via three modes:

  • Gross Budgetary Support (GBS): Rs 8,139 crore
  • Recap Bonds: Rs 80,000 crore
  • Market Raising: Rs 10,312 crore

The government divided banks into two catergories viz Non PCA banks and PCA banks to infuse capital. The capital allocation is as per details below:

Non PCA Banks
Banks FY’18 (amt in crores)
State Bank of India 8,800
Punjab National Bank 5,473
Bank of Baroda 5,375
Canara Bank 4,865
Union Bank of India 4,524
Syndicate Bank 2,839
Andhra Bank 1,890
Vijaya Bank 1,277
Punjab & Sind Bank 785
Total 35,828
PCA Banks
Banks FY’18 (amt in crores)
IDBI Bank 10,610
Bank of India 9,232
UCO Bank 6,507
Central Bank of India 5,158
Indian Overseas Bank 4,694
Oriental Bank of Commerce 3,571
Dena Bank 3,045
Bank of Maharashtra 3,173
United Bank of India 2,634
Corporation Bank 2,187
Allahabad Bank 1,500
Total 52,311

Annual Ease Index Survey of Banks

An annual survey of banks will be conducted by reputed independent agency which will rank banks on EASE (Enhanced Access and Service Excellence) parameters. The survey results will be made public every year.

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