General Studies IIIBankingEconomy

Indradhanush Scheme for Banks

About Indradhanush Scheme:

  • Mission Indradhanush for PSBs that was launched by the Government in 2015. The government, to resolve the issues faced by the Public Sector Banks, launched a 7 pronged plan called “Mission Indradhanush.”
  • The Indradhanush for PSBs mission aims at revamping the functioning of the Public Sector Banks to enable them to compete with the Private Sector Banks. It seeks to revive economic growth through the reduction of political interference in the functioning of PSBs and improving credit.
  • Mission Indradhanush is a 7-pronged plan to address the challenges faced by public sector banks (PSBs). Many of the measures taken were suggested by P J Nayak committee on Banking sector reforms as indicated.
  • The 7 parts include appointments, Banks board bureau, capitalisation, de-stressing, empowerment, framework of accountability and governance reforms (ABCDEFG)


  • The RBI had embarked on the Asset Quality Review (AQR) exercise from December 2015 and had set a deadline of March 2017 to complete the exercise.
  • As part of it, RBI had asked banks to recognise some top defaulting accounts as non-performing assets (NPAs) and make adequate provisions for them.
  • Under ‘Indradhanush’ roadmap announced in 2015, the Union Government had announced an infusion of Rs. 70,000 crore in state-run banks over four years.
  • Banks also were allowed to raise a further Rs. 1.1 lakh crore from the markets to meet their capital requirement in line with global risk norms, Basel-III.
  • In line with the plan, PSBs were given Rs. 25,000 crore in 2015-16, and a similar amount was earmarked for the current fiscal 2016-17. Besides, Rs. 10,000 crore each will be infused in 2017-18 and 2018-19

Seven Colours to resurrect Public Sector Banks

  1. Appointments:
    • The Government decided to separate the post of Chairman and Managing Director and there would be another person who would be appointed as non Executive Chairman of PSBs.
    • This approach is based on global best practices and as per the guidelines in the Companies Act to ensure appropriate checks and balances.
    • The selection process for both these positions has been transparent and meritocratic.
  2. Board of Bureau: 
    • The BBB will be a body of eminent professionals and officials, which replace the Appointments Board for appointment of Whole-time Directors as well as non-Executive Chairman of PSBs.
    • They will also constantly engage with the Board of Directors of all the PSBs to formulate appropriate strategies for their growth and development.
  3. Capitalisation:
    • As of now,the PSBs are adequately capitalized and meeting all the Basel III and RBI norms.
    • However, the GOI wants to adequately capitalize all the banks to keep a safe buffer over and above the minimum norms of Basel III.
    • Infusion of 25,000 crore rupees of capital into debt-laden banks in this fiscal in phased manner. Out of this 20,000 crore rupees would be injected in August 2015.
  4. De-Stressing PSBs: 
    • Projects are increasingly stalled/stressed thus leading to NPA burden on banks.
    • In a recent review, problems causing stress in the power, steel and road sectors were examined.
    • Pending policy decisions to facilitate project implementation/operation would be taken up by respective Ministries.
    • Flexibility in restructuring of existing loans wherever the Banks find
    • Six new Debt Recovery Tribunals (DRT) to speed up the recovery of bad loans of the banking sector
    • To develop vibrant debt market for PSBs in order to reduce lending pressure on banks. Strengthen asset reconstruction of companies.
  5. Empowerment: 
    • 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.
    • Banks will build robust Grievances Redressal Mechanism for customers as well as staff so that concerns of the affected are addressed effectively in time bound manner.
    • The Government intends to provide greater flexibility in hiring manpower to Banks.
  6. Framework of Accountability: 
    • A new framework of Key Performance Indicators (KPIs) to be measured for performance of PSBs.
    • Streamlining vigilance process for quick action for major frauds including connivance of staff.
  7. Governance Reforms: 
    • The process of governance reforms started with “Gyan Sangam” – a conclave of PSBs and FIs organized at the beginning of 2015 in Pune.
    • There was focus group discussion on six different topics which resulted in specific decisions on optimizing capital, digitizing processes, strengthening risk management, improving managerial performance and financial inclusion.
    • Next Gyan Sangam will be held between 14 to 16 Jan 2016 to discuss strategy with top level officials.

Positive aspects of Indradhanush:

  1. Would curb increasing NPA. Currently they have increased to 4.5% of GDP.
  2. Would ensure better focus on recruitment, appointment, accountability and governance.

Indradhanush 2.0

  • Indradhanush 2.0 will be finalised by Reserve Bank of India (RBI) after completion of Asset Quality Review (AQR) which is likely to be completed by end of March 2017.
  • It aims to clean up the balance sheets of PSBs to ensure banks remain solvent and fully comply with global capital adequacy norms, Basel-III.

CAG report on Indradhanush:

  • According to a report by the CAG, the Centre’s ‘Indradhanush’ scheme to recapitalise public sector banks (PSBs) based on their performance was not implemented in a manner envisaged.
  • As per the scheme, a portion of the recapitalisation was to be based on the bank’ performance. However, this was not followed during disbursal of funds.
  • The parameters used to determine whether banks required capital changed from year to year and in some years the rationale for capitalising banks was not even recorded. Hence, the scheme’s target of raising Rs. 1.1 lakh crore from the markets by 2018-19 was not likely to be met.
  • Also, some banks that did not qualify for additional capital as per the decided norms, were infused with capital, and in some cases, banks were infused with more capital than required

Challenges: But there are some reasons to be skeptical about Indradhanush:

  1. High on platitudes: Improve accountability, better governance, empower management are platitudes mentioned by every committee. No specific measures have been specified to achieve these objectives
  2. Half measures: even after many recommendations, govt. has not diluted its stake below 50% even when it can easily maintain a majority share.
  3. External dual control: Dual control of RBI and finance ministry is the source of many problems but no effort has been made to address this. Also external vigilance by CVC and CBI has affected risky decision making.
  4. Failure to streamline RBI role: Dept. of banking supervision and dept. of banking regulation have failed to control NPA or to create a competitive banking sector.
  5. BBB has 2 govt. officials and RBI governor. Thus, it would be difficult to ensure independent appointments.
  6. Disinvestment has not been talked about. Reducing govt’s stake is key to banking reforms. Infusing capital will increase stake of govt.
  7. Help to PSBs through capital will not ensure level playing field for private sector banks.
  8. Places too much importance on market to raise capital. It is very time taking as the PSBs do not enjoy confidence.
  9. While the senior appointments have been addressed well, what about the midlevel and  junior bank officials? execution of policies are in their hand. They were not addressed in this project.
  10. Further addressing the issue of Non-performing assets failed to explain how the system of fast approval and clearance for big infrastructure projects would be done. the project did not discussed about any effective mean to monitor and regulate bad loans or training of banking officials which is highly recommended in order to update the work force.

Thus though the Indradhanush is hopeful to create a hopeful or customer friendly banking sector, as long as these challenges are addressed, this novel initiative would become another effort, lost in pages of history.

Basel norms:

Basel I is a set of international banking regulations put forth by the Basel Committee on Bank Supervision (BCBS) that sets out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. The BCBS regulations do not have legal force. Members are responsible for their implementation in their home countries. 

Basel I was the BCBS’ first accord. It was issued in 1988 and focused mainly on credit risk by creating a bank asset classification system. The bank must maintain capital (Tier 1 and Tier 2) equal to at least 8% of its risk-weighted assets. For example, if a bank has risk-weighted assets of $100 million, it is required to maintain capital of at least $8 million.

The Basel I classification system groups a bank’s assets into five risk categories, classified as percentages: 0%, 10%, 20%, 50%, and 100%. A bank’s assets are placed into a category based on the nature of the debtor. Public sector debt can be placed in the 0%, 10%, 20% or 50% category, depending on the debtor    

Basel 2 norms:

Basel II improved on Basel I, first enacted in the 1980s, by offering more complex models for calculating regulatory capital. The three essential requirements of Basel II are:

  • Mandating that capital allocations by institutional managers are more risk sensitive.
  • Separating credit risks from operational risks and quantifying both.
  • Reducing the scope or possibility of regulatory arbitrage by attempting to align the real or economic risk precisely with regulatory assessment.

Basel 3 norms:

Basel III is a comprehensive set of reform measures, to strengthen the regulation, supervision and risk management of the banking sector

Basel 3 measures aim to:

  • Improve the banking sector’s ability to absorb ups and downs arising from financial and economic instability. 
  • Improve risk management and governance of banking sector.
  • Strengthen banks’ transparency and disclosures

Major changes proposed in Basel 3 over earlier accords:

Better Capital Quality:  Better quality capital means the higher loss-absorbing capacity. This in turn will mean that banks will be stronger, allowing them to better withstand periods of stress

Capital Conservation Buffer: Now banks will be required to hold a capital conservation buffer of 2.5%.  The aim is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress

Countercyclical Buffer: The objective is to increase capital requirements in good times and decrease the same in bad times.  The buffer will slow banking activity when it overheats and will encourage lending when times are tough

Minimum Common Equity and Tier 1 Capital Requirements: The minimum requirement for common equity, has been raised under Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier 1 capital requirement, consisting of not only common equity but also other qualifying financial instruments, will also increase from the current minimum of 4% to 6%

Leverage Ratio: A leverage ratio is the relative amount of capital to total assets (not risk-weighted). This aims to put a cap on swelling of leverage in the banking sector on a global basis. 3% leverage ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in January 2018

Liquidity Ratios: A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are to be introduced in 2015 and 2018, respectively




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