How Can India Revitalise its PSU Banks?

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TOPIC: General Studies 2

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

India’s PSU banks have serious problems of non-performing assets (NPAs). Most of these flow from capital intensive infrastructure projects, primarily in the power sector. More recently, telecom is another sector where large amount of credit is involved. The total magnitude of NPAs, bulk of them is related to sectors where the government is major player.

Normally, the problems may include errors in market, technology changes and the weak management, then the traditional methods of bankruptcy and takeover of assets works.

But when the government is stakeholder and the amounts are very large, then there is a merit in argument that a sectoral approach of looking at the problems at the macro level for a particular sector would make more sense to solve the NPA crisis than going after the normal bankruptcy code proceedings, firm by firm.

Bank loans have bad loans which are nearly 15-16% of total assets. For these to resolve, some of the options are:

• Take haircuts on many of these projects and then recapitalize by government in another way. However, this calls for political courage.
• It is true that economy cannot see revival of investment momentum without bank’s lending. If the bank’s capital is to be fund from outside the government, then there should be lower of government’s stake below 50%. This will encourage faster decision making power as well as work efficieny.
• There is lack of clarity of direction as to where the PSBs are headed. In the past three years, there have been number of initiatives to restructure debts and commit some amount of capital. However, the commitment to recapitalize from the government is not coming.
• There has been fast paced Asset Quality Review to clean up balance sheet of banks so that all NPAs are recognized upfront. However, there is an imbalance- the fast paced AQR has increased the magnitude of NPAs several times and at the same time, RBI has shifted large borrowers to the bond market. These are contributing to the weakening of the PSBs as they are demanding more provision of capital but shifting of AAA borrowers to bond market is hitting the income of banks.
• As per PJ Nayak committee report and Indradhanush plan, there would be banking board bureau and governance reforms. These are strengthening initiatives lagging behind which is causing lack of clarity of direction.
• Write-off of debt is not a sustainable option. If NCLT is seen to be a mechanism for promoters to recycle their own companies, they can get their company back minus the debt which is not good. This would be public funding of private profiteering. The IBC must bar original promoters from bidding for that asset again.
• At the same time, there are genuine cyclical problems, as in steel sector or power where there is government problem. Many state governments are refusing to honor their power purchase agreements, many state utilities are bankrupt and are not in shape to purchase power. Those who invested money in power plants find that there are no takers for it and suffer losses. These kind of issues are to be tackled separately as they are separate from pure mismanagement. The developed countries have 1-2% interest rates. If this money can be channeled into the fund which buys out these viable projects which are not working because of government problems, it can help the banks to resurface positively. But this also requires political initiative.
• Amidst these option, merging PSBs doesn’t fit and is not an option. Acquisitions and mergers are complex. There is added challenge in rigidity in government culture, their HR policies, compliances etc. Within the public sectors, mergers don’t work with ease as they work in flexible market economy like USA. However, consolidation option is being considered for a while but it is yet to be seen what steps are taken in future.

Way forward

For banks, the raw material is capital that comes from shareholders and right now the government is not much in position to provide capital. The focus should be completely on NPA problems right now.  Policies should be made wherein long gestation sectors such as infrastructure sector should be ideally funded by debt market and not banks. The sum involved and the loans sanctioned is huge. Private players which have network as well as human talent should be encouraged to expand. There is a requirement of deep structural changes in the ownership and running of banks.

Key words

Indradhanush Plan- A2G Plan

1. Appointments
2. Bank Board Bureau
3. Capitalization
4. De-stressing PSBs
5. Empowerment
6. Framework of Accountability
7. Governance Reforms

P J Nayak Committee- Governance in Bank Boards

Also Read:

Bad Bank- A Bankable idea?

All India Radio (AIR) : NPAs of Public Sector Banks

Connecting the dots:

• Discuss various ways initiated by government to solve the NPA problem.