Verma panel findings

04 Oct 1999

1
The Verma panel headed by M S Verma, former chairman, State Bank of India, has submitted its report to the Reserve Bank of India. The scope of the committee, set up by the RBI in February 1999, was one of identifying weak public sector banks( PSBs), to study the problems of weak banks, to undertake an examination of each weak bank and identify the those which are potentially revivable and to suggest a strategic plan of financial, organisational and operational restructuring for weak public sector banks.

Overview
Until the banks started adopting prudential norms relating to income recognition, asset classification, provisioning and capital adequacy, 26 out of the 27 public sector banks were reporting profits. Only UCO Bank was incurring losses from 1989-90. In 1992-93, the profitability of the 27 banks as a group turned negative with as many as 12 nationalised banks reporting net losses. In March 1996, when the banks had to attain capital adequacy of 8 per cent, eight public sector banks were still short of the prescribed level.

Compounding the problems for the PSBs were the deregulation of interest rates on deposits and advances that intensified competition and the starting of operations by a few private sector banks with good institutional backing.

The Verma panel has stated that while some PSBs have adjusted themselves to the changing business environment and handled competition well, others have not been able to do so.

Three banks which are in serious trouble are Indian Bank, UCO Bank and United Bank of India. These banks have faced continuous decline in profitability and efficiency and have depended on capital support from the government. They find themselves in a vicious circle of declining capability to attract good business on the one hand and the increasing need for capital support on the other.

Earlier, the committee on banking sector reforms had identified a weak bank as one with accumulated losses and net non-performing assets exceeding the net worth of the bank or where operating profits less the income on recapitalisation bonds has been negative for three consecutive years. The Verma panel has recommeded the use of the following seven parameters in conjunction with the two suggested by the committee on banking sector reforms. They are:

  • capital adequacy ratio
  • return on assets
  • net interest margin
  • ratio of operating profit to average working funds,
  • ratio of cost to income
  • coverage ratio and 
  • ratio of staff cost to (net interest income + all other income) 

Findings
The Verma panel has reported on the three worst affected banks as follows.  
Indian Bank: The bank is still under losses. The capital adequacy ratio which had turned positive and reached 1.41 per cent in March 1998 with capital infusion of Rs. 1,750 crore from the government, turned negative again in March 1999. The bank has not made provision for liabilities arising on account of the proposed wage revision. The NPAs are also mounting. Gross NPA went up to Rs. 3,709 crore as on 31 March 1999, from Rs. 3,428 crore as on 31 March 1998. This is equivalent to 37 per cent of gross advances of the bank. This was the highest among public sector banks.

UCO Bank: The bank’s operating profit improved marginally in 1998-99. However, if the interest income on recapitalisation bonds is excluded, the bank would have incurred operating loss of Rs. 91 crore in 1997-98 and Rs. 157 crore in 1998-99. Recapitalisation by the government to the tune of Rs. 200 crore helped the bank achieve capital adequacy of 9.63 per cent in 1998-99. Just like Indian Bank, Uco Bank has also not made any provision for liability on account of wage revision. Gross NPAs as on 31 March 1999 aggregated Rs. 1,716 crore. Net NPAs was Rs.715.63 crore, compared to Rs. 705 crore as on 31 March 1998. The bank has been unable to register any improvement in its net NPA position.

United Bank of India: The bank's operating profit decreased substantially in 1998-99. Operating income increased largely due to extraordinary income by way of interest received on income tax refund. Moreover, if the interest income on recapitalisation bonds is excluded, the bank would have incurred operating loss of Rs. 117 crore in 1998-99 and Rs. 89 crore in 1997-98. Recapitalisation by the government to the extent of Rs.100 crore helped the bank achieve capital adequacy of 9.60 per cent in 1998-99. The bank has not made provision for future pension liability and wage revision during 1998-99. The gross NPAs of the bank as on 31 March 1999 increased to Rs. 1,549 crore from Rs. 1,451 crore as on 31 March 1998. Net NPAs also went up to Rs. 573 crore as on 31 March 1999 from Rs. 472 crore as on 31 March 1998.

The panel has recommended a conditional bailout amounting to Rs.5,500 crore for Indian Bank, United Bank of India and Uco Bank. These banks have been identified as weak banks. The panel has identified six more banks categorised as distressed, which are Allahabad Bank, Central Bank of India, Indian Overseas Bank, Punjab & Sind Bank, Union Bank of India and Vijaya Bank. These banks are on the threshold of becoming weak.

The three weak banks should go for a voluntary retirement scheme for 25 per cent of their staff and if that fails to remove excess staff, they should go in for a 25 per cent wage cut across the board. A wage freeze also is suggested for the next five years with retrospective effect from November 1997. It has also recommended that the capital adequacy for weak banks should be one per cent above the minimum requirement.

Indian Bank has been recommended to sell its associate companies and the United Bank of India has been asked to sell its foreign branches. The unviable branches of the weak banks should be merged.

An asset reconstruction company will buy Rs.3,000 crore of non performing assets from the three weak banks as part of the Rs.5,500 crore package (KIRON-This point is not explicitly mentioned in any of the papers that the Rs.3,300 crore is part of the Rs.5,500 crore).



Revival plans prepared by the banks
The plans prepared by the banks at the instance of the working group were no better than the earlier ones.  They continue to prepare plans based on ambitious projections of business and income growth, for which they neither had the skill nor the technology. Hence, the restructuring plans drawn up by the banks never met with success. The general feeling is that as long as there is government assurance on capital infusion, these banks would only look at soft options,  regardless of the time and cost involved.

Conclusion
The Verma panel concluded saying that the restructuring programme will have to encompass operational, organisational, financial and systemic restructuring. The committee has strongly suggesting sticking to the implementation in a time bound manner. It feels that any delay will add to the restructuring cost. If the recommendations of the committee are implemented in a piecemeal manner, the desired effect will not be attained.

The option to close the banks have been given far lesser weightage than the option to privatise the banks or merging them.

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