Banking Sector Reforms

[op-ed snap] Banking on good faith

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Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached stories

Mains level:  Complement this newscard with some of our previous newscards on the same issue, [op-ed snap] Reforms needed to back bank recapitalisation and [op- ed snap] A bold step in bank reform


Recapitalization plan

  1. About Rs. 1 lakh crore is expected to be pumped into India’s 21 public sector banks by March, which the Centre hopes will enable them to extend fresh credit lines worth over Rs. 5 lakh crore to spur economic activity

PCA (prompt corrective action)

  1. The Reserve Bank of India has placed, a significant part of the recapitalization plan, under the prompt corrective action, or PCA, framework
  2. The RBI deploys the PCA to monitor the operation of weaker banks more closely to encourage them to conserve capital and avoid risks
  3. For these entities, this capital(provided under the plan) offers a fresh lease of life as it will help meet regulatory requirements under the Basel-III regime
  4. Also, it cushions them to an extent from possible haircuts on stressed loans that are going through the insolvency resolution process

Government’s view on the Financial Resolution and Deposit Insurance legislation

  1. While announcing this package, the government has described each of the banks as “an article of faith”
  2. Its assertion that no public sector bank will fail and that depositors’ money will remain safe
  3. It diminish allay customers’ worry about the safety of their savings under the proposed Financial Resolution and Deposit Insurance legislation

Is there any future plan?

  1. More structural reforms may well be on the anvil(open for discussion) in the second half of this recap plan, which the RBI had described
  2. Yet, the absence of any reference to consolidation through mergers is glaring
  3. Moreover, the government has repeatedly ruled out privatisation of these banks, the only one where it intended to offload its majority stake
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