[op-ed snap] The government needs to handle public sector banks with care

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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: PCA by RBI, Recapitalization Plan, Insolvency and Bankruptcy Code

Mains level: The editorial discusses the difficulties in the operations of PSU Banks thereby creating NPAs


News

Low Confidence in the working of PSU banks

  1. PSU banks are grappling with a high level of bad loans, and a number of them have been put under RBI’s prompt corrective action and are not in a position to lend.
  2. In the March quarter, PSU banks booked losses in excess of Rs 62,000 crore and the total gross non-performing assets (NPAs) stood at about Rs 9 trillion.
  3. Although the government is in the process of recapitalizing state-run banks, it is likely that the current Rs 2.11 trillion PSU bank recapitalization plan will not be sufficient to put the PSU banks back on track.
  4. Since PSU banks own about 70% of banking assets, their inability to lend will have a direct impact on economic growth.

Fear of Investigation amongst CEOs

  1. Four out of 21 PSU banks have not appointed replacements for chief executive officers (CEOs) and top executives in nine more banks are expected to leave in the coming months.
  2. However, it is likely that the government will find it difficult to attract talent due to the fear of investigative agencies among bankers.
  3. A number of present and former senior executives are under investigation for past transactions ex. Chanda Kochar
  4. The government must ensure that investigations don’t become a witch-hunt, and that the issue is handled with utmost care.

Problem of Valuation of Stressed Assets and Capital Infusion Plan

  1. The government is now mulling the formation of asset reconstruction companies for faster resolution of bad loans and has constituted a committee to make recommendations in this regard.
  2. But the basic problem will be valuation of stressed assets.
  3. The ARC will need a significant amount of capital, which the government is not in a position to provide.
  4. In fact, now that India has the Insolvency and Bankruptcy Code in place, there is no need for the government to form an ARC. Banks should be able to resolve bad assets under this framework.

Lacking Governance reforms for PSU Banks

  1. The government has refrained from micromanaging PSU banks, but this in itself will not solve the problem.
  2. A situation where banks run without a CEO should never arise.
  3. PSU banks should be in a position to attract talent by offering competitive compensation at every level to be able to improve their operation and risk management systems.
  4. Only when banks are run by professionals will they be in a position to fund India’s growth in the long run and create value for all stakeholders, including the taxpayer.

The Way Forward

  1. At a broader level there should be clarity on the future of PSU banks.
  2. In fact, some of the banking reforms will only work if a clear roadmap is defined.
  3. For instance, if the government believes that a few banks should focus on under-banked areas, some financial support may be warranted.
  4. Perhaps banks should be allowed to focus on specific areas of strength so that they become more efficient over time and are not dependent on budgetary support for growth.
  5. It will be difficult to sustain higher growth without a strong banking system
NPA Crisis
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