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.
