What is the issue?
- RBI Deputy Governor Acharya recently acknowledged that the financial health of India’s public sector banks (PSB) is shocking.
- Also, the extremely slow pace of reforms to address NPAs is worrying.
What is the background?
- For the first time in at least two decades, the loan books of the PSBs shrank as advances fell by Rs 1.35 lakh crore in 2016-17.
- This is not surprising since weak balance sheets cannot support healthy credit growth.
- Far from kick-starting growth, Indian PSBs actually need capital to merely survive.
- The government is in no position to supply the capital to kick-start the PSBs.
What are the measures taken so far to address the NPAs?
- The Central Repository of Information on Large Credits (CRILC) was created in 2014.
- Asset Quality Review (AQR) was initiated in 2015.
- Also, the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016 helped plug a massive regulatory gap.
- While this was expected to provide for a quicker resolution of NPAs, some of the recent court verdicts in insolvency cases may queer the pitch.
What are the measures being considered?
- Recapitalisation - The “Indradhanush scheme” for recapitalising banks, although a good initiative, it might not be enough to address the current crisis.
- The PSBs need a far more powerful impetus that could save them, from the non-performing assets (NPAs) burden, which in some cases is in excess of their net worth.
- Disinvestment - The Cabinet Committee on Economic Affairs had authorised an alternative mechanism to bring down the government’s stake in the PSBs to 52%.
- But this is not a practical solution given the political compulsions as well as the lack of investor appetite in buying weak banks.
- Mergers - The Union Cabinet has also been pushing for mergers.
- But as the case with the State Bank of India shows, mergers are no guarantees for turnarounds.
- In fact, they may pull down banks that were performing well.
- Also, most PSBs have exposure to the same set of stressed assets and a merged entity might end up with a larger exposure to stressed sectors.
What is one possible way ahead?
- The government and PSB boards should consider selling off or divesting stakes in subsidiaries and non-core businesses.
- The money so raised can be ploughed into their core operations.
- There is much to learn from PSBs that have reduced their stakes in their insurance ventures.
Source: Business Standard
