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Three cheers for the Verma Panel! - Views on News from Equitymaster
 
 
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  • Oct 5, 1999

    Three cheers for the Verma Panel!

    Yes, that's what the occasion calls for. The Verma Panel, appointed by the Reserve Bank of India, to look into the banking sector to identify and suggest measures to resuscitate the weak banks has submitted its report.

    We have often been critical about measures taken by the government to recapitalise public sector banks. This is mainly due the fact that the government fails to ensure that these bank/s put in place a concrete plan, which will make their operations profitable so that the need for recapitalisation does not arise again. On the contrary, the Verma panel, while preferring the route of recapitalisation, has set strict preconditions for the banks to become eligible for the same.

    The preconditions call for:

    • Three public sector banks - Indian Bank, Uco Bank and United Bank of India, will either have to shed 25% of their staff through either a voluntary retirement scheme (VRS) or reduce wages.
    • These three banks will have to freeze wages for the next five years.
    • They will have to sell off their subsidiaries and foreign operations.

    The recommendations include:

    • Appointment of younger, 'war-time generals' as CMDs with a proposed tenure of 4-5 years, supported by dynamic boards.
    • Set up of asset reconstruction fund (Rs 10 bn), which will buy out the non-performing assets of the three banks.
    • Rs 30 bn will pumped in as fresh capital into these banks.
    • Rs 3-4 bn to be spent of upgrading technology in these banks.

    These preconditions are a first for the Indian banking industry and will be undoubtedly opposed by the worker unions. In the larger interest of the society, these must be implemented. However, it is the political will that will finally decide to which extent the recommendations will be implemented. This could possibly lead to a dilution of the preconditions.

    The Verma panel's decision to set up an asset reconstruction fund, which will hand over the non performing assets to a professional assets management company in the private sector is another step that needs to be lauded. This will ensure that while the defaulting companies are dealt with in a severe manner at the same time no stones are left unturned in trying to recollect the loans.

    Overall, the panel's recommendations are path breaking, and if implemented fully, will definitely go a long way in improving the vibrancy of the public sector banks.

     

     

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