The NPA related concerns are rising in public sector banks.
Privatisation of PSBs is seen as a viable option but it alone won’t solve the concerns.
What factors aggravated NPAs in PSBs?
During high growth period, FY07 to FY12, corporate groups has invested in mega projects in power, metals and infrastructure.
They were funded by domestic banks.
By FY13, with regulatory hurdles hitting some projects and scams stalling others, many projects failed to take off and these groups landed in a classic debt trap.
Many companies took on more loans to manage their debts, which eventually turned into NPAs.
Which in turn took on a five-fold expansion in their aggregate debt from Rs. 1 lakh crore to Rs. 5.5 lakh crore (present value of NPAs).
Many PSBs chairman were given high political pressures to sanction loans to the companies which were favourable to politicians.
Why privatisation is encouraged?
PSBs have been criticised for poor lending decisions, inadequate risk controls, and bad governance.
Privatisation has been presented as a panacea to the many ills plaguing Government-owned banks.
There is a belief that the public sector equates to inefficiency and corruption, while private ownership automatically brings with it efficiency, financial prudence and governance.
RBI data shows that that 9.3 per cent of the industry loan book for private sector banks was stressed by March 2017, as opposed to 28.8 per cent for PSBs.
As of end-March 2016, RBI data showed that public sector lenders accounted for over 90 per cent of the Rs. 5.5 lakh crore gross NPAs with banks.
What measures needs to be taken?
Forcing the owners of the distressed corporates to sell their assets and de-leverage them will tackle existing stressed loans, the process is already underway under the new Bankruptcy Code.
To ensure greater checks and balances against miss-allocation of capital, borrowings and diversion of funds India need to introduce structural reforms.
Indian banks need access to early warning systems on NPA recognition, which can be achieved by integrated efforts of SEBI, RBI and the Bankruptcy Board.
