If accepted by the RBI and the government, this will be the second major bail-out of these banks in the last three years. The government had already pumped in Rs 6,740 crore in the form of recapitalisation funds in these sick banks. For Indian Bank alone which has accumulated losses of Rs 3,181 crore in the last four years, the previous government had pumped Rs 1,750 crore as fresh capital.

The RBI panel, headed by formerState Bank of India chairman M S Verma, has has drawn up a four-dimensional programme involving operational, organisational, financial and systemic restructuring. It has suggested recapitalisation through recapitalisation bonds and cash to raise the capital adequacy ratio of the banks to one per cent over the minimum required. The report included recommendations for staff and branch reduction, closure and merger of bank branches, system changes and management of bad loans.

For purposes of achieving the recommended capital adequacy, estimated to cost the government Rs 3,000 crore, the panel said the banks should have an obligation to give a return. "Recapitalisation must be accompanied by strict conditions relating to operating as well as managerial aspects of the recipient bank's working," the report said. Closure of the three banks will only be considered as the last option, and privatisation will be difficult given the high costs of restructuring, it said.

UCO and Indian Bank should sell their foreignbranches and Indian bank should sell its subsidiaries, it suggested. With staff expenses forming over 75 per cent of costs in these three banks, the group has suggested a six-month voluntary retirement scheme to cover at least 25 per cent of staff. Commenting on this, the report says ``this step is unavoidable since continuing with the present strength could jeopardise the survival of the three banks.''

The scheme is estimated to cost the three banks between Rs 1,100 crore and Rs 1,200 crore. The group has also suggested a freeze on all wage increases including the one effective November 1997 that banks are considering. The panel has recommended that a government owned ARF be set up with a capital of Rs 1,000 crore, with contribution from the government and institutional investors, to buy the banks' non-performing assets (NPAs).

Indian Bank's NPAs were Rs 3,709 crore or 38.7 per cent of gross advances at the end of 1998/99 (April-March). UCO Bank's NPAs were Rs 1,716 crore or 22.55 per cent of advancesand UBI's were Rs 1,549 crore or 32.39 per cent of advances at the end of 1998/99, the report said.

The ARF should be managed by a independent private sector Asset Management Company (AMC) with a capital of not more than Rs 15 crore and should have a limited life of seven years, the group has suggested. The ARF may be required to acquire assets worth Rs 3,000 crore face value from the banks and will have to be set up under a special act of the parliament to protect it from obstructive litigation from borrowers, it said.

"The ARF will be set constituted with the objective of buying impaired loans from the weak banks and to recover or sell them after some reconstruction or in an `as is where is' condition," the report said. The ARF will pay the banks for the assets through interest-bearing bonds with a likely maturity of five-years, which may be government guaranteed and have a lock-in period of two years, the report said. It has also suggested reconstitution of banks' boards to include professionals,industrialists and financial experts. The report is also critical of the management of the banks saying ``leadership is lacking in the middle levels of these banks because of inadequacies of skills.''

The RBI is keen on implementing all aspects of the report and governor Bimal Jalan is expected to take it up as soon as the new government is in place. "Backed by political will, some tough decisions need to be taken to strengthen the Indian banking system. The report has given the right direction," RBI officials said.

However, there are skeptics about the practicability of the proposals. ``The Verma panel report was submitted only after end of the crucial phase of polling in the Lok Sabha elections. The three weak banks have already absorbed Rs 6,740 crore worth of recapitalisation funds, but they have not improved their financial position. What's the guarantee that the funds won't disappear again? After all, this money belong to the taxpayers,'' said a banker.

VERMA PANEL'S PRESCRIPTION