What is the issue?
Making troubled public sector banks into narrow banks (these can’t lend big) could be considered, with recent crises in PSBs.
What is the need?
- The RBI has put restrictions on all fresh lending by Dena Bank.
- It has restricted lending to risky assets and raising high-cost deposits for Allahabad Bank.
- This comes after further deterioration in their performance in 2017-18.
- Besides, many other banks under prompt corrective action (PCA) are witnessing a downfall.
- This became evident with recent declaration of their financial results for 2017-18.
What is the government's response?
- The government may ask the RBI to revise the PCA framework.
- This is to ensure that such specific lending restrictions are not put in place.
- This comes in the backdrop of the fears that more banks under PCA may face lending curbs.
What was the earlier approach?
- The idea of turning troubled public sector banks into narrow banks was not welcomed some time back.
- It was felt that it would squeeze the flow of fresh credit.
- This in turn was perceived to be dangerous for growth.
- But with the latest financial results, RBI has made lending restrictions on some banks.
- This effectively makes all of them narrow banks.
What is the changing scenario with banks?
- Cash dispensing - Banks no longer need to be primary dispensers of cash.
- There are “white label” ATMs which are owned not by banks but independent companies.
- Commercial establishments would dispense cash with the help of point of sale machines.
- This will be particularly useful in villages.
- The local all-purpose kirana shop can be the cash dispenser.
- Payments system - Banks no longer need to be the mainstay of the country’s payments system.
- With digital payments, old big banks carry a far smaller part of the payments load.
- The National Payments Corporation of India (NPCI) is in place.
- They greatly facilitate the adoption of an electronic payments system.
- It has also introduced the RuPay card.
- Even cooperative and regional rural banks have issued these for their customers who normally do not use cards.
- Moreover, the “unified payments interface” is run by the NPCI.
- It has enabled instant payments across banks with the use of mobile phones.
- Deposit taking - One key role that PSBs have so far performed well is deposit taking.
- It offers a safe place for people to keep their deposits.
- PSBs were able to raise the national savings rate after bank nationalisation.
- This has in turn helped raise the rate of economic growth.
- But to continue this, government will have to sharply raise the level of deposit insurance.
- Periodic episodes of cash crunch following demonetisation point to an underlying fear about security of bank deposits.
- Dealing with deposits - What banks do with these deposits is an important task.
- They can continue to dispense personal loans.
- But their earlier major activity of lending to micro, small and medium businesses is being taken over.
- This is done far more efficiently by microfinance organisations and the new small finance banks.
- PSBs can participate in this sector by buying the securitised assets of small finance banks and MFIs.
- Lending for corporates - Non-banking finance companies with the ability to manage risk and lend in individual sectors are emerging.
- They are also hiring top banking talent.
- The NBFCs will seek to refinance themselves by securitising these loans.
- PSBs can invest in these NBFC issued securities with underlying loan assets which will be rated.
- This will enable PSBs to earn a higher return than offered by government bonds.
- This can also be taken up at a lower risk than lending directly.
What lies ahead?
- Public sector banks have considerably lost their public confidence.
- This necessitates a fundamental change in the country’s banking scenario.
- To survive, PSBs can pare their lending and cash dispensing roles.
- Deposits can be invested in securitised assets of small banks.
Source: The Hindu
Quick Fact
Prompt Corrective Action (PCA)
- PCA is primarily to take appropriate corrective action on weak and troubled banks.
- The RBI has put in place some trigger points to assess, monitor and control banks.
- The trigger points are on the basis of CRAR (a metric to measure balance sheet strength), NPA and ROA (return on assets).
- Based on each trigger point, the banks have to follow a mandatory action plan.
- It prohibits them from undertaking fresh business activities such as opening branches, recruiting talent or lending to risky companies.
- RBI could take discretionary action plans too apart from these.
