How Far Can IndraDhanush Go?

Finance Minister Arun Jaitley recently announced the Indradhanush framework – a reform structure for transforming the public sector banks. We spoke with Subir Gokarn (Director of Research, Brookings India and former Deputy Governor, Reserve Bank of India) over an e-mail interview to find out what he thinks of this new initiative of the government.

Swarajya: How is IndraDhanush different or not from banking reforms of previous governments?

Subir Gokarn: Public sector banks in India are dealing with a number of challenges today. Over the next four years, they will have to mobilize large amounts of capital to comply with Basel III adequacy norms. During this process, they will also have to deal with a huge attrition of people due to a bunching of retirements.

Currently, they are dealing with a massive burden of bad assets. And, through all this, there are questions of autonomy and interference. A rather complicated situation to try and resolve all at once! As a strategic approach, IndraDhanush, encompassing seven elements, does take a comprehensive view of the problems and suggests a series of measures to deal with them. Not all the problems are addressed with equal emphasis, in my view, but as a framework into which internally consistent measures can be incorporated, it is a positive start.

S: What would be the implications of the government still holding more than 50% stake in the concerned banks? How contingent are other reforms of the scheme on this one measure?

SG: It will certainly constrain their ability to raise the required capital, unless the government provides it. If it has to be generated internally, there will be a premium on profitability which would require significant human resources and autonomy for the leadership. 

Essentially, the pressure on all the other components of the strategy will increase in the absence of a change in the ownership pattern. This doesn’t mean that it’s impossible; just a lot more difficult and risky.

S: If IndraDhanush is successful as a policy, how long is the lag period likely to be before results start showing?

SG: It really is a strategy for structural change, so the returns will be visible over the medium to long term – 3 to 5 years. But, we should begin to see some early indications of success – for example, credible signals towards autonomy and the governance framework that was laid out can happen quite soon.

If a bad bank is being considered to help re‐structure balance sheets, this should result in higher lending and profitability. Getting talent from outside, not just at the MD level but below it as well would be another indication of progress. In essence, there are some input and effort based indicators that will show early success, while the outcome based indicators will be visible over a longer horizon.

S: With allocation of tranches as under IndraDhanush, do the concerned banks have any incentive to rectify their working structure and create their own capital?

SG: There must be credible threat against leaders and management that the capital infusion is not the end of the story. Performance must be rewarded and under‐performing banks should believe that their future is at some risk if the situation persists. Clearly, when it comes to consolidation and closure of decisions, political battles will have to be fought. But, even if this becomes a binding constraint, some visibly differential treatment between high and low performers is a must.

S: Which sector of the economy is IndraDhanush most likely to benefit? Agriculture, manufacturing or services?

SG: I don’t think this is the right way to look at success. To the extent that well‐run and autonomous banks will make the right credit and investment decisions, the overall efficiency of capital allocation will increase, which should translate into a higher rate of GDP growth with any given level of investment. However, to the extent that even good prospect borrowers in, say, the SME sector are finding it difficult to access credit because of the current constraints on lending, this might be a sector that benefits. The main thing is that good borrowers will benefit.

S: One can argue that in India, allocations of funds and appointments of people on posts are seen as ends in themselves, whereas they are only the first steps in the realisation of a programme. Do you see a similar flaw in IndraDhanush as well?

SG: As I said, there are several explicit dimensions to Indradhanush, but there are some critical implicit ones as well. The point you are raising in the question is one of these. No strategy is going to work unless a clear distinction between objectives and instruments – means and ends – is made and maintained throughout the process. All the people concerned with implementation must recognize and comply with this.

S: Is there something in IndraDhanush which you identify as the result of PM Modi’s personal intervention?

SG: Prime Minister Modi has personally championed the Jan Dhan Yojana, both in terms of expanding access to the banking system for all Indians and creating credit, pension and insurance products that can flow through the access pipeline. For this mission to succeed, banks need to be healthy and profitable. Presumably, this is what Indrdhanush is intended to achieve.