Governance Issues - Public sector banks

Why in news?

Bad loans of public sector banks are Snowballing and it poses a systemic risk to the country’s economic system.

What are the issues plaguing the PSB’s?

• Banks lend longer term loans to large infrastructure projects, although their expertise lies in granting short term working capital loans.
• Senior government officials, with political backing, hold overarching control over banks.
• This has led to poor choice of the top management for the banks and inadequate governance standards.
• RBI’s latest financial stability report considers the risks of asset quality deterioration and additional capital requirement of banks to be “high”.

• This was shown by huge write-offs on PSB’s loans, once the firms go in for bankruptcy and the subsequent necessity for huge recapitalisation of the banks.
• Though it creates a substantial fiscal burden, it is necessary to enable the banks meet their minimum capital adequacy requirements.
• Even then banks will generate a substantial pile of fresh bad debts, if there is no change in the governance structures that created bad loans before.

  What are the measures taken so far?

• Banks Board Bureau was created to bring about a fundamental change in the selection of top management and governance standards.

• Asset quality reviews was initiated in order to end window-dressing and recognise non-performing assets (NPAs) to avoid evergreen lending.
• Large NPAs of over Rs.2,000 crores, once failed to achieve a resolution within 180 days will have to be referred immediately under IBC.

How Project sashakt will be useful in this regard?

• Large defaulters, above Rs.500 crores, will be brought under it to create a vibrant market for online trading of stressed assets.
• Banks will first pass on the defaulted accounts to an asset reconstruction company(ARC).
• ARC will restructure the assets, define haircuts and transfer their ownership to one or more asset management companies (AMCs), which will be funded by sector-specific alternative investment funds (AIFs).
• This makes banks to get paid for the restructured assets with the ownership passing on to the AMC-AIFs.
• Failure to complete the process in 180 days will attract IBC proceedings under NCLT for the stressed company.
• Still it doesn’t make much headway, since bank managements become reluctant to agree to substantial haircuts or discounting of their dues.

What is the way forward?

• Around 60% of experts feel that “continuous rise of NPAs and falling governance standards in banks continue to be a cause for concern.”
• The RBI says in its annual report for 2017-18 that over the medium term growth will depend on “resolution of banking and corporate financial stress.” 
• Both IBC and Sashakt take care of “continues rise in NPAs” but not “governance standards”.
• Hence, bad debts will reappear with the government being compelled to recapitalise the banks again.
• That would amount to a systemic risk with fiscal instability and insufficient bank credit becoming a periodic feature in the country.

Source: Business Line