Indradhanush, the seven-pronged strategy for public sector banks announced by the government has a potential to boost the performance of PSU banks but may fail on three counts, says a report by CRISIL Ratings.

The government had announced higher capital infusion for 2015-16 and 2016-17. According to one plan, Rs 25,000 crore would be infused this year (FY16), the same amount the next year, and Rs 10,000 crore each in 2017-18 and 2019-20.

The government had on Friday said it would infuse Rs 20,088 crore into 13 public sector banks within a month's time with the country's largest lender, State Bank of India, cornering Rs 5,531 crore.

 It also announced top-level appointments in five public sector banks. According to the CRISIL note, the plan to provide a clear roadmap on capital infusion and maintain a capital buffer beyond the regulatory minimum reinforces its stance that the credit ratings of public sector banks would remain in the 'high safety' category in the near term.

"The proposals can help public sector banks effectively deal with the malaise of NPAs, and potentially grow faster than our earlier estimate of 12 per cent annually till fiscal 2019," CRISIL noted.

It said Indradhanush takes cognizance of both internal and external factors that influence the performance of public sector banks. The internal ones are better governance, greater efficiencies and a performance evaluation framework that incentivises management focus on capital conservation and credit rating.

The external factors are linked to legal, recovery and dispute resolutions such as coercing promoters to sell non-core assets, setting up fraud resolution processes and six new debt recovery tribunals, and enhancing the role of asset reconstruction companies.

It added the plan would also rely on the efforts made by the Reserve Bank of India such as the setting up of a Central Repository of Information on Large Credits and the Joint Lenders' Forum, its guidelines on reporting of 'special mention accounts' and the wilful defaulter framework.

According to the note, the timeline given for setting up a Bank Board Bureau from the next financial year and the announcement of inducting professionals as non-executive chairmen will eventually drive qualitative changes in governance, strategy formulation, capital efficiency, and human resource practices.

Besides, allowing bonus and stock options for senior management will make public sector banks competitive and go a long way in attracting the right talent.

The multi-pronged strategy is also likely to be a game-changer.  The formation of the Bank Board Bureau, as part of the project, will surely help PSU banks free themselves from the shackles of bureaucracy and provide greater autonomy and longer tenures for bank chiefs, said senior industry officials.

Chiefs of PSU banks, on an average, have had tenures of three years compared with ten-year long tenures of their private peers. This, say senior bankers, has led to lack of a long-term vision for PSU banks.

However, the seven-point plan falls short  of three crucial ingredients - setting up a 'bad bank' to address the issue of non-performing assets (NPAs), disproportionately higher upfront capital infusion, and tackling human resource problems in mid-to-senior levels - according to CRISIL Ratings.

These three steps could have helped in building additional confidence, the analytical and research firm stressed in a note.

In its report India Ratings said, "regarding de-stressing banks' balance sheets, the government hasn't adequately addressed the problems of rising bad loans in the system. Indian banks may need up to Rs 1 lakh crore over and above their Basel-III capital requirements to manage the concentration risks arising out of their exposure to highly levered, large stressed companies."

Of this, public sector banks will need Rs 93,000 crore, which is equivalent to an equity writedown of about 1.7% of the banks' risk weighted assets, and represents the loan haircut that banks may face to revive the financial viability of distressed accounts.

But the project Indradhanush hinges on banks raising capital from the market, which at this stage is difficult as market conditions are not favourable and most of the banks are saddled with large quantum of non-performing assets.

"The need to raise funds from the equity market remains, despite the planned capital infusion by the government, and it is therefore imperative for government banks to improve performance and market valuations. Also, the lack of importance given by the government to asset quality will mean that we may not see much improvement in asset quality stress for PSU banks," India Ratings said.

While unveiling the seven-point reform agenda, the government had announced appointing private sector professionals to run two of its largest banks — Bank of Baroda and Canara Bank. While managing director and CEO of VBHC Value Homes Pvt Ltd PS Jayakumar, a former Citi banker was appointed to head Bank of Baroda, MD and CEO of private sector lender Laxmi Vilas Bank Rakesh Sharma was hired to head Canara Bank.

But the plan to hire laterally at the mid-level is partly fueled by the government’s wish to professionalise state-run lenders and improve their efficiency and partly from the large number of vacancies that are coming up in these banks.

The AK Khandelwal Committee report on human resource issues in PSBs had estimated that over 1 lakh employees, including 50,000 officers would retire from these banks in a five-year period between 2010 and 2015.

More recent estimates peg total vacancies in public sector banks at about 79,000 vacancies in the current and the next year.

However, bank employee unions are not too happy with the proposal pointing out that it would impact morale of existing officers in the PSBs.

The All India Bank Employees Union (AIBEA) has opposed the move, pointing out that it would not only affect the morale of existing staff but also that the aim of PSBs is different from private banks. “Why should private sector individuals be hired? It will frustrate and demoralise existing workers. Private sector banks only look to make profits while public sector banks work for social banking,” said CH Venkatachalam, general secretary AIBEA.

AIBEA, which has also opposed appointment of private sector bankers to head Canara Bank and Bank of Baroda, will also take up the issue at the planned all India strike on September 2 by all Central trade unions and their affiliates.