Verma Panel Findings Ppt

7/31/2019 Verma Panel Findings Ppt

1/17

VERMA PANEL FINDINGS

Presented by

M SRINIVASA RAO

FINAL M.B.A


2/17

The Verma panel headed by M.S

Verma, former chairman, State Bankof India


3/17

The scope of the committee, set up by theRBI in February 1999, was one of identifying

weak public sector banks ( PSBs), to studythe problems of weak banks, to undertake anexamination of each weak bank and identify

the those which are potentially revivable andto suggest a strategic plan of financial,organisational and operational restructuring

for weak public sector banks.


4/17

Overview

Until the banks started adopting prudential normsrelating to income recognition, asset classification,provisioning and capital adequacy, 26 out of the 27public 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 turnednegative with as many as 12 nationalized banksreporting net losses. In March 1996, when the bankshad to attain capital adequacy of 8 per cent, eightpublic sector banks were still short of the prescribedlevel.


5/17

Compounding the problems for the PSBswere the deregulation of interest rates ondeposits and advances that intensified

competition and the starting of operationsby a few private sector banks with goodinstitutional backing


6/17

The Verma panel has stated that whilesome PSBs have adjusted themselves tothe changing business environment and

handled competition well, others have notbeen able to do so.


7/17

Three banks which are in serious trouble

are Indian Bank, UCO Bank and UnitedBank of India. These banks have facedcontinuous decline in profitability andefficiency and have depended on capital

support from the government. They findthemselves in a vicious circle of decliningcapability to attract good business on the

one hand and the increasing need forcapital support on the other.


8/17

Earlier, the committee on banking sector reforms hadidentified a weak bank as one with accumulated losses

and net non-performing assets exceeding the net worthof the bank or where operating profits less the incomeon recapitalization bonds has been negative for threeconsecutive years. The Verma panel has recommendedthe use of the following seven parameters in conjunction

with the two suggested by the committee on bankingsector reforms.

They are:


9/17

capital adequacy ratio

return on assets

net interest margin

ratio of operating profit to averageworking funds,

ratio of cost to income

coverage ratio and

ratio of staff cost to (net interest income+ all other income)


10/17

Findings

The Verma panel has reported on the threeworst affected banks as follows.


11/17

Indian Bank:

The bank is still under losses. The capital adequacy

ratio which had turned positive and reached 1.41 percent in March 1998 with capital infusion of Rs. 1,750crore from the government, turned negative again inMarch 1999. The bank has not made provision for

liabilities arising on account of the proposed wagerevision. The NPAs are also mounting. Gross NPA wentup to Rs. 3,709 crore as on 31 March 1999, from Rs.3,428 crore as on 31 March 1998. This is equivalent to37 per cent of gross advances of the bank. This was

the highest among public sector banks.


12/17

UCO Bank:

The bank's operating profit improved marginally in 1998-99. However, if the interest income on recapitalizationbonds is excluded, the bank would have incurred operatingloss of Rs. 91 crore in 1997-98 and Rs. 157 crore in 1998-99. Recapitalization by the government to the tune of Rs.200 crore helped the bank achieve capital adequacy of 9.63per cent in 1998-99. Just like Indian Bank, Uco Bank hasalso not made any provision for liability on account of wagerevision. Gross NPAs as on 31 March 1999 aggregated Rs.

1,716 crore. Net NPAs was Rs.715.63 crore, compared toRs. 705 crore as on 31 March 1998. The bank has beenunable to register any improvement in its net NPA position.


13/17

United Bank of India:

The bank's operating profit decreased substantially in1998-99. Operating income increased largely due toextraordinary income by way of interest received onincome tax refund. Moreover, if the interest income onrecapitalisation bonds is excluded, the bank would haveincurred operating loss of Rs. 117 crore in 1998-99 and Rs.

89 crore in 1997-98. Recapitalisation by the government tothe extent of Rs.100 crore helped the bank achieve capitaladequacy of 9.60 per cent in 1998-99. The bank has notmade provision for future pension liability and wagerevision during 1998-99. The gross NPAs of the bank as on

31 March 1999 increased to Rs. 1,549 crore from Rs. 1,451crore as on 31 March 1998. Net NPAs also went up to Rs.573 crore as on 31 March 1999 from Rs. 472 crore as on31 March 1998.


14/17

The panel has recommended a conditionalbailout amounting to Rs.5,500 crore for IndianBank, United Bank of India and Uco Bank. Thesebanks have been identified as weak banks. Thepanel has identified six more banks categorised

as distressed, which are Allahabad Bank, CentralBank of India, Indian Overseas Bank, Punjab &Sind Bank, Union Bank of India and Vijaya Bank.These banks are on the threshold of becoming

weak.


15/17

The three weak banks should go for a voluntaryretirement scheme for 25 per cent of their staff and ifthat fails to remove excess staff, they should go in for a

25 per cent wage cut across the board. A wage freezealso is suggested for the next five years withretrospective effect from November 1997. It has alsorecommended that the capital adequacy for weak banksshould be one per cent above the minimum requirement.

Indian Bank has been recommended to sell its associatecompanies and the United Bank of India has been askedto sell its foreign branches. The unviable branches of theweak banks should be merged.


16/17

CONCLUSION

The Verma panel concluded saying that the restructuringprogramme will have to encompass operational,organisational, financial and systemic restructuring. Thecommittee has strongly suggesting sticking to theimplementation in a time bound manner. It feels that anydelay will add to the restructuring cost. If therecommendations 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 lesserweightage than the option to privatise the banks ormerging them.


17/17

Thank you

Documents

Verma Panel Findings Ppt