Revitalising Public Sector Banks

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.