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Government to fund three weak banks - Views on News from Equitymaster
 
 
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  • Jan 10, 2000

    Government to fund three weak banks

    As per the recommendations of the Verma committee on weak banks, the central government has decided to pump in Rs 30 bn into Indian Bank, UCO Bank and United Bank of India.

    They have decided to adopt this approach instead of closing down the banks as recommended earlier by the Kamat committee. The Verma committee report has worked out a revival package to the tune of Rs 55 bn for the three banks. The main recommendations being:

    • A Rs 12 bn voluntary retirement scheme (VRS) to reduce the work force by 25%,
    • Wage freeze for the next five years,
    • Rs 30 bn capital infusion to their capital adequacy,
    • A Rs 10 bn asset reconstruction committee to be set up to cleanse the balance sheet,
    • Rs 3-4 bn for technology upgradation.

    Out of Rs 30 bn the government has decided to pump in Rs 5 bn for their voluntary retirement schemes and Rs 2.5 bn for capital infusion basically to clean up their balance sheets and to enable these banks to raise funds from the market. In addition to this the government is trying to get a soft loan of Rs 3 bn from the World Bank for the technology upgradation of these weak banks.

    The recommendations suggested on paper do seem difficult to put into practice. This would put a burden on the government's budgetary allocations. To add to this it would be difficult for the strong bank unions to digest VRS for their employees apart from wage freeze and they are likely to put up harsh terms before they accept the recommendations. However since the other option for these banks is closure the unions would likely to be more flexible.

    The setting up of the asset reconstruction committee too does not seem an entirely practical way of cleaning up of NPA's, as administration costs are very high. While this infusion is fine to clean up the balance sheets temporarily the long run solution would come about only when these banks realize the importance of managing or reducing the NPA levels and also improving on their credit appraisal systems.

     

     

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