Centre may revamp framework for setting state-owned banks' targets

New framework could be on lines of earlier 'Statement of Intent' used to fix annual targets, will monitor performance on parameters such as return on assets, NPA, financial inclusion initiatives

The Centre may revamp the target-setting mechanism for public sector banks (PSBs) and is looking to come up with a fresh framework to monitor the performance of state-owned lenders. The new framework could be on the lines of ‘Statement of Intent’ (SoI) the government used to sign with PSBs to fix their annual targets.

If implemented, the new framework will monitor the performance of these banks based on parameters such as return on assets (RoA), reducing non-performing assets (NPA), efforts taken to improve financial inclusion, customer-centric initiatives, among others, an official said.

Through EASE 5.0, the common reforms agenda for PSBs, state-owned lenders have also been asked to prepare a three-year strategic roadmap for their respective banks. The framework for respective banks may be used for setting their targets through the new framework, said the official.

At present, the boards of state-owned lenders, which also comprise of government officials, are empowered to set internal targets based on certain defined parameters including credit growth, cash recoveries and financial inclusion. The board of PSBs monitors the respective banks’ performance based on these defined parameters. The performance of whole-time directors of PSBs is monitored based on government-prescribed criteria based on which they receive incentives.

The SoI mechanism was introduced in 2005 to set annual goals and monitor the performance of PSBs based on parameters such as cost-to-income ratio, net profit per employee and ratio of staff in branches to total staff, among others. Targets were discussed between the Ministry of Finance and banks. In 2015, the centre introduced changes to the framework by inserting key performance indicators (KPIs) that were used to monitor PSBs performance due to delays in the previous target-setting exercise. These new parameters included efficient use of capital, diversification of business/processes and NPA management and financial inclusion. Certain qualitative parameters were also included such as strategic steps taken to improve asset quality, efforts made to conserve capital, HR initiatives and improvement in external credit rating, among others. The performance of banks based on this new framework was linked to the performance bonus to be paid to the MD & CEOs of banks by the government.

The centre discontinued the practice of signing SoIs few years ago, and moved to board-level setting and monitoring of targets in consultation with the government, and some aspects being covered through the EASE reforms agenda. Through the EASE reforms, performance of whole time directors were aligned with banks business goals and priorities. Government reviews the performance of public sector banks every quarter.

In the works

1. New framework may mirror statements of intent signed with PSBs earlier
2. Performance may be monitored based on parameters, such as RoA, lowering NPAs, efforts taken to improve financial inclusion, and customer-centric initiatives
3. Three-year strategic road map asked from PSBs under EASE 5.0 may be used for setting targets
4. Currently PSB boards that have government representation are empowered to set internal targets, monitor performance of whole-time directors