Verma Committee Report on Weak Banks

By Dr. A. C. SHAH

Summary

Dr. A. C. Shah — an economist and former chairman/managing director of Bank of Baroda — delivered this address under the auspices of the Forum of Free Enterprise on 20th October 1999 to summarise and endorse the M. S. Verma Working Group Report on weak public-sector banks. He argues that Indian banking stands on the threshold of a transformation as consequential as the 1969 nationalisation, propelled by two Narasimham Committee Reports (1991 and 1998), the transnational pressures of globalisation, and the urgent diagnosis delivered by the Verma Group. The three banks the Group identifies as weak — Indian Bank, UCO Bank and United Bank of India — are presented as the acute case, but Shah stresses that the malaise is system-wide: 27 public-sector banks together display an uneasy picture as of March 1999, and many beyond the three weak names also fail multiple Verma tests of solvency, earning capacity and profitability.

Shah walks the audience through the Verma Group’s proposed restructuring architecture: a Financial Restructuring Authority (FRA) created by a Special Act of Parliament, atop a government-owned Asset Reconstruction Fund (ARF) managed by an independent private-sector Asset Management Company (AMC) capitalised at Rs. 15 crores with 51 per cent private holding. The ARF would buy impaired loans (around Rs. 3,000 crores face value) from weak banks, financed through government-guaranteed special bonds, while RBI would operate a dedicated Special Wing for weak-bank supervision. He details the cost arithmetic — about Rs. 5,500 crores over three years, broken down across technology upgradation, a Voluntary Retirement Scheme (Rs. 1,100–1,200 crores) cutting staff by roughly 25 per cent, NPA buyout (Rs. 1,000 crores) and capital adequacy support (Rs. 3,000 crores) — and underlines that gradualism is not an option.

In the concluding section Shah moves from exposition to advocacy. He singles out the legal framework — an archaic, borrower-biased regime under which BIFR and the Debt Recovery Tribunals have failed — as the central bottleneck, and looks to the T. R. Andhyarujina Expert Group on recovery of bank dues for a fix, urging that its report be released in parts given the urgency. He calls for political will, an Indian Banks Association-led dialogue with trade unions on overstaffing and wage freezes, and a fresh approach to bank leadership, citing the U.K. and U.S. practice of recruiting industry leaders into banking. Shah closes by predicting that, if implemented fully, the Verma plan will reshape the map of Indian banking — with mergers, privatisation, ADR issuance and ICICI/SBI-style consolidation accelerating — and ending with the conviction that Indian banks have the ability; what they need is strong will.

Key points

• Frames the Verma Working Group Report as the third major driver of an impending banking revolution, alongside the 1991 and 1998 Narasimham Committee Reports and the transnationalisation of finance.

• Names the three weak banks — Indian Bank, UCO Bank and United Bank of India — and reports that, judged on the Verma Group’s seven solvency/earning/profitability tests, only seven of 27 PSBs qualify as ‘good’ as of March 1999.

• Endorses the Verma three-tier restructuring architecture: Financial Restructuring Authority (FRA) under a Special Act of Parliament, a government-owned Asset Reconstruction Fund (ARF), and a private-sector-managed Asset Management Company (AMC) with 51 per cent private holding.

• Quantifies the restructuring price tag at roughly Rs. 5,500 crores over three years — Rs. 300–400 crores technology, Rs. 1,100–1,200 crores VRS, Rs. 1,000 crores NPA buyout and Rs. 3,000 crores capital adequacy.

• Identifies the archaic legal framework — biased toward borrowers, with BIFR and the Debt Recovery Tribunals failing — as the binding constraint, and looks to the T. R. Andhyarujina Expert Group for legal reform.

• Treats overstaffing and over-unionisation as systemic problems requiring a 25 per cent staff reduction via the Voluntary Retirement Scheme, a wage freeze, and IBA-led engagement with the trade unions.

• Argues that bank leadership has been ‘stunted’ by short tenures and lateral transfers, and recommends drawing top industry leaders into banking on the U.K./U.S. model.

• Anticipates that successful implementation will accelerate mergers, privatisation and ADR-based capital raising — citing SBI’s ADR plan and ICICI’s lead — and reshape the map of Indian banking.

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