Current Affairs

Indradhanush Scheme-Finance Sector




Finance minister Arun Jaitley on Friday launched a seven pronged plan– Indradhanush–to revamp functioning of public sector banks.

The move was also welcomed by the Reserve Bank of India that has frequently underlined the deteriorating health of PSBs. “The allocation for the first year is adequate…it’s a good beginning,” said RBI governor Raghuram Rajan.


The Public Sector Banks (PSBs) play a vital role in India’s economy. In the past few years, because of a variety of legacy issues including the delay caused in various approvals as well as land acquisition etc., and also because of low global and domestic demand, many large projects have stalled. Public Sector Banks which have got predominant share of infrastructure financing have been sorely affected. It has resulted in lower profitability for PSBs, mainly due to provisioning for the restructured projects as well as for gross NPAs.


A) Appointments:

The Government decided to separate the post of Chairman and Managing Director by prescribing that in the subsequent vacancies to be filled up the CEO will get the designation of MD & CEO and there would be another person who would be appointed as non-Executive Chairman of PSBs( A global best practice , checks and balances, in Companies Act guidelines).

B) Bank Board Bureau:

The BBB will be a body of eminent professionals and officials, which will replace the Appointments Board for appointment of Whole-time Directors as well as non-Executive Chairman of PSBs. the BBB will comprise of a Chairman and six more members of which three will be officials and three experts (of which two would necessarily be from the banking sector).

C) Capitalization:

the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore. Government is also presuming that the emphasis on PSBs financing will reduce over the years by development of vibrant corporate debt market and by greater participation of Private Sector Banks.

Government also thinks that out of 1.8 lakh crores, 1.1 lakh crores Banks will themselves generate due to improved governance, tight NPA norms, significant operating environments, value from non core assets and 70000 crores will be provided by government over four years.


a) De-stressing PSBs—Some of the Actions to be taken are

  1. Project Monitoring Group (Cab. Sectt.) / Respective Ministries will pursue with concerned agencies to facilitate issue of pending approval/permits for infrastructure
  2. Pending policy decisions would be taken up by respective Ministries/Departments.
  3. Ministry of Coal/PNG will evolve policies to address long-term availability of fuel for these projects.
  4. Respective Discoms will be provided hand-holding towards enabling early reforms.
  5. Promoters will be asked to bring in additional equity in an attempt to address the worsening leverage ratio(look at how much capital comes in the form of debt (loans) and whether that  can be honoured by it.) of these projects. When promoters not able to do that,bank can consider viable options for control of management
  6. RBI has been requested to consider the proposal of the Banks for granting further flexibility in restructuring of existing loans wherever the Banks find viability.


b) Strengthening Risk Control measures and NPA Disclosures:

i) RBI has released guidelines dated 30 January, 2014 for “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy” suggesting various steps for quicker recognition and resolution of stressed assets:

  • Creation of a Central Repository of Information on Large Credits (CRILC) by RBI.
  • Formation of Joint Lenders Forum (JLF), Corrective Action Plan (CAP), and sale of assets.

ii) Flexible Structuring of Loan Term Project Loans to Infrastructure and Core Industries – RBI issued guidelines


iii.) Wilful Default/Non-Cooperative Borrowers: A non-cooperative borrower is a borrower who does not provide information on its finances to the banks. Banks/FIs are required to make higher provisioning as applicable to substandard assets in respect of new loans sanctioned to such borrowers.

iv.) Asset Reconstruction Companies:

RBI has tightened the norms for Asset Reconstruction Companies (ARCs) where the minimum investment in Security Receipts should be 15% which was earlier 5%. This step will increase the cash stake of ARCs in the assets purchased by them. Further, by having more cash up front, the banks will have better incentive to clean their balance sheet.

Security Receipts: Security receipt means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation.

v.) Establishment of six New Debt Recovery Tribunals to fasten bad loans recovery.

E) Empowerment:

The Government has issued a circular that there will be no interference from Government and Banks are encouraged to take their decision independently keeping the commercial interest of the organisation in mind.

The Government intends to provide greater flexibility in hiring manpower to Banks.

F) Framework of Accountability:

The present system for the measurement of bank’s performance was a system called SoI – Statement of Intent. Based on certain criteria decided by Ministry of Finance, the banks used to come up with their annual target figures which was discussed between the Ministry and banks and finalized. The entire exercise took very long and sometimes the targets for banks used to be finalized only towards the end of the year which is not a desirable thing to do.


  1. A new framework of Key Performance Indicators (KPIs) to be measured for performance of PSBs.Operating performance evaluated through the Key Performance Indicators framework will be linked to the performance bonus to be paid to the MD & CEOs of banks by the Government.
  2. The quantum of performance bonus is also proposed to be revised shortly to make it more attractive.
  3. also considering ESOPs for top management of PSBs.

G) Governance Reforms:


  • strengthening of risk management practices. Each bank agreed to nominate a senior officer as Chief Risk Officer of the bank.
  • optimizing capital
  • digitizing processes
  • improving managerial performance
  • financial inclusion.


  • RBI does not seem to be involved in the far-reaching changes being contemplated for the banking sector.The RBI governor, of course, will be heading theBank Boards Bureau (BBB), which would soon begin the selection of its members. BBB itself would be an “interim arrangement” until the government sets up a holding company, which will hold all the government stakes in banks and “may take over some of the government’s current role in their management.”
  • The appointment is still in the hands of Government officials—search committee will have two secretaries and the Bank Board Bureau will have three Government Officials.
  • Indradhanush doesn’t provide the framework for setting up Bank Investment Company.
  • Selecting Chairperson through Government appointment may lead to interference with autonomy and functioning of banks.
  • According to P.J. Nayak committee

 “Governance difficulties in public sector banks arise from several externally imposed constraints. These include

  1. dual regulation, by the Finance Ministry in addition to RBI; board constitution;
  2. significant and widening compensation differences with private sector banks;
  3. external vigilance enforcement though the CVC and CBI…”

The solution suggested by the committee was this: “If the Government stake in these banks were to reduce to less than 50 per cent, together with certain other executive measures taken, all these external constraints would disappear. This would be a beneficial trade-off for the Government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully.

But government has made no mention of its equity stake in PSBs falling below 51%. The government’s position is that it would allow its equity to fall only up to 52%.

  • Government infusion of capital would be “money down the drain” if PSB performance had not improved over time.
  • The proposals are well short of the Nayak Committees’ proposal for parity in practices (including pay) between PSBs and private banks. Such parity cannot happen unless the government allows its equity holdings in PSBs to fall below 51%. This would require amendments to the statutes, which does not seem politically feasible in the near future.

On the whole, the government has embraced the form proposed by the Nayak Committee but not the content. This is a sensible and pragmatic approach. There is scope for improving performance within the framework of public ownership, as our experience in most of the post-reform period has shown.


"Mission Indradhanush aims to bring professionalism and efficiency in Public Sector Banks".Critically Comment.

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