Government to set up new process to appoint state bank officials

The government decided late on Monday to draw up a new process to appoint top officials at state-run banks, as part of its efforts to fix a distressed banking system that is hampering the economy's recovery from its longest slowdown in years.

As a result, eight posts of bank chiefs and 14 posts of their deputies will fall vacant and have to be filled up "de novo", the finance ministry said in a statement, without giving further details.

The move comes months after an investigation began into whether the head of state-controlled Syndicate Bank took bribes to roll over a loan to family-controlled Bhushan Steel.

The investigation not only raised broader concerns about weak oversight, corruption and politically directed lending at state banks, but also brought into focus irregularities in appointments at the banks.

In its wake, Prime Minister Narendra Modi's administration set up a panel, which also included Reserve Bank of India (RBI) governor Raghuram Rajan, to examine the process adopted this fiscal year for appointing top management at state banks.

Stressed loans - those categorised as bad and restructured - currently amount to about 10 per cent of all loans, making banks circumspect over lending. Fitch Ratings expects stressed assets to reach 14 per cent of loans by March next year.

While a sluggish economy is the main reason for a rise in distressed assets, an RBI report in August also blamed lending to certain "excessively leveraged" groups.