IAS UPSC Prelims and Mains Exam – 25th May 2019
TOPIC: General studies 2 and 3
- Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
- Inclusive growth and issues arising from it.
Resolving NPA Crisis: II
In order to put the slowing economy back on track economic reforms needs to be taken. Reforms in banking must surely be top priority.
- Banks were forced by the RBI and the central government2 to disclose evergreened loans and provision for them.
- A new Bankruptcy Code was legislated to allow lenders to take charge of the resolution process.
- Operational issues at public sector banks (PSBs).
- Putting in tax payers’ money to keep them afloat.
- Investors and depositors have very little assurance that a similar NPA crisis will not recur in future.
To prevent repetition of the NPA crisis, structural reforms at PSBs are imperative on three counts.
Poor credit appraisal and risk management systems:
- It led banks concentrating their loans in a handful of borrowers. This need drastic overhaul.
- RBI recently imposed tighter curbs on the group-level and firm-level exposures of banks, capping them at 40 per cent and 20 per cent respectively of Tier-1 capital. But such limits cannot substitute for the PSBs’ lack of in-house talent in credit and project appraisal, which needs urgent fixing.
- RBI needs to work on internal early warning systems that leverage analytics to head off credit bubbles too.
- While mis-judgement can be condoned, strict enforcement action needs to be taken against bankers who willingly colluded with corporate borrowers to evergreen loans.
- There’s also need for a thorough overhaul of recruitment policies at PSBs, greater accountability from their top managements and Boards and performance-linked compensation.
- Political interference has played an egregious role in diverting bank funds to crony capitalists.
- Fixing this issue requires deep-rooted governance reforms that distance the management and Boards of PSBs from their promoter — the Central government.
- A roadmap for the transfer and gradual dilution of the government shareholding in PSBs is now critical, as is the strengthening of the toothless Bank Boards Bureau.
- RBI on its part needs to work through recent setbacks to the IBC process to put it back on its feet.
Resolving NPA crisis would help bring back the Indian public’s and depositors’ confidence in banks.
Connecting the dots:
- In order to put the slowing economy back on reforms in banking must surely be top priority. Comment.
Also read: Resolving the NPA crisis