Finance minister Nirmala Sitharaman, who announced a mega merger of public sector banks and massive cash infusion, said the intention was not just to give capital but also ensure good governance.
The government is working on strengthening PSU banks and improving their governance, she said in New Delhi on Friday.
Banking experts have long said that just pumping government money alone will not improve the condition of India’s public lenders or suffice to overcome massive bad debt problems.
“Banks will need more capital infusions, improvement in governance - including consolidation - and cuts in government stakes over a period of time,” said Sonal Varma, chief economist at Nomura in Singapore told Reuters recently.
Banks need better systems to expedite settlement of corporate default cases for them to emerge out of the distress, going by the experience of previous bailout attempts and the build-up of major stresses in the economy and in corporate India.
Almost every week there is talk of another major company getting into financial difficulties or facing an investigation for fraud or other malfeasance, according to a Reuters report.
On Friday, Sitharaman announced the following reforms in the banking sector.
1. To make management accountable to the board. A committee of board should appraise the performance of the general manager and officers above that rank.
2. To make the span of control manageable in large public sector banks. Boards to be given the flexibility to introduce CGM level officers as per requirement.
3. PSBs must be allowed to recruit Chief Risk Officer from market, at market-linked compensation.
4. To enable succession planning, boards to decide system of individual development plans.
5. Boards given flexibility to prescribe residual tenure of two years for GM and above to ensure sufficient tenure.
6. Boards given flexibility to enhance sitting fees of Non-Official Directors.
7. Boards given mandate to rationalise Board Committees for better functioning.
8. Risk management committee to be given mandate to fix accountability for compliance of Risk Appetite Framework.
9. Longer term to directors on Management Committee of Board (MCBs).
10. MCB loan sanction threshold enhanced by up to 100 percent.
11. Non-Official Directors (NODs) to perform role analogues to independent directors.
12. Boards given mandate for training of directors; evaluate NOD performance.
13. ED strength in large banks raised to four.
14. Creation of leadership pipeline under BBB's Development Programme.
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