What can be seen as a major step in making ‘financial inclusion’ a reality, finance minister Arun Jaitley announced in budget of 2015 the creation of MUDRA Bank to refinance microfinance institutions under a Prime Ministerial scheme.

MUDRA Bank with a corpus of Rs 20,000 crore and credit guarantee corpus of Rs 3,000 crore will be created. In lending, priority will be given to small businesses owned by scheduled class and scheduled tribes.

Further, the proposed ‘payments banks’ is all set to get a major boost with finance minister announcing that postal network with 1,54,000 points of presence spread across villages will be used for increasing access of the people to the formal financial system.
 
"I hope postal department will bring the proposed Payment Bank venture successfully so that it can contribute in Pradhan Mantri Jan Dhan Yojna”, said Jaitley.
 
Applications for licensing of small finance banks and payments banks closed on February 2 and as many as 72 applications for small finance banks and 41 applications for payments banks were received by the RBI.

Prime minister Narendra Modi had recently highlighted the significance of postal network in ensuring financial inclusion.

Revamping PSBs management

At the beginning of the year itself a retreat for banks and financial institutions” called “Gyan Sangam” was organized in Pune. Among various suggestions to reform the working of the public sector banks (PSBs), a major one was to implement the recommendations of P J Nayak Committee to review the governance of the board of banks.
 
Moving in this direction finance minister announced the setting up of an autonomous Bank Board Bureau to improve the governance of public sector banks. While announcing the creation of the board finance minister said ,“The bureau will search and select heads of public sector banks and help them in developing differentiated strategies of capital raising plans to innovative financial methods and instruments”. He also said that this would be a step towards establishing a holding and investment company for banks.
 
While prime minister assured the bankers at the retreat of all possible autonomy the announcement of the Bank Board Bureau can be seen as a stamp to the promise made at the retreat.
 
Nayak  committee has recommended government to distances itself from several bank governance functions. For this purpose it recommends that the bank nationalisation Acts of 1970 and 1980, together with the SBI Act and the SB(Subsidiary Banks)Act, be repealed, all banks be incorporated under the Companies Act, and a Bank Investment Company (BIC) be constituted to which the Government transfers its holdings in banks.
 
The Government's powers should also be transferred to BIC. It also suggested that the process of board appointments needs to be professionalised and a three phase process is envisaged.

The MUDRA Bank would primarily be responsible for :

1) Laying down policy guidelines for micro/small enterprise financing business

2) Registration of MFI entities

3) Regulation of MFI entities

4) Accreditation /rating of MFI entities

5)  Laying down responsible financing practices to ward off indebtedness and ensure proper client protection principles and methods of recovery

6) Development of standardised set of covenants governing last mile lending to micro/small enterprises

7) Promoting right technology solutions for the last mile

8) Formulating and running  a Credit Guarantee scheme for providing guarantees to the loans which are being extended to micro enterprises

9) Creating  a good architecture of Last Mile Credit Delivery to micro businesses under the scheme of Pradhan Mantri Mudra Yojana

 Banking Reforms proposed in the budget

Performance of Public Sector Banks has remained sub-optimal so far.  The government is taking various steps to improve the situation both on governance side and otherwise.  The focus of these reforms is to improve the quality of deliberations in bank boards, leading to better asset quality and further resulting in better market valuations.

What has been done

(i)   Separation of the post of Chairman and Managing Director.

(ii)  Enabling provision for the appointment as MD & CEO in five major banks, so that wider choice is available.  Both Public Sector and Private Sector bankers can apply.  Higher salary can be given in appropriate cases.

(iii)  Revamping of present selection system which inter-alia includes structured three separate interviews, allotment of banks on merit-cum-preference basis.

(iv)  Blue print for road map for reforms on the basis of deliberations carried out in GyanSangam, a two days top level retreat organised by the department.

(v)   Allocation of capital purely on the basis of efficiency parameters so that banks start focusing on these.

(vi)  Clear instructions from the department regarding no interference whatsoever in any matter whether related to HR issues or credit decisions or even otherwise.

What Next

(i)      In order to improve the Governance of Public Sector Banks, the Government intends to set up an autonomous Bank Board Bureau with professionals as its members.  It would be responsible for search and selection of heads of PSBs, as also for Non-Official Directors on the Boards of Banks.  This would be an interim step towards moving in the direction of having a Bank Investment Company.

(ii)      Guidelines relating to appointment of non-official directors is being revisited to ensure that bank boards get people with relevant expertise.  Anybody eligible would be able to apply through a website which will soon be available in the public domain.

(iii)     Government’s role in relation to public sector banks is that of promoter.  As a promoter, the banks have been entering into anMoU for achieving certain objectives known as Statement of Intent.  The whole system of Statement of Intent is being revised with provision for higher cash incentives.

(iv)  Government wants to encourage Bank Boards to restructure their business strategy and also suggest way forward for their consolidation and merger with other banks if it is win-win for both.