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Q. Rebooting public sector banks: Comment on the issues of NPA’s in public sector banks.
Apr 22, 2017 Related to : GS Paper-3

Ans :

Introduction-

The public sector banks (PSB’s) in India are facing the issue of increasing bad debts and non –performing assets. The bad lending is cause of concern for Indian banking sector, particularly to the state owned banks. Though PSB’s command large deposit base in comparison to other banks, but considering precarious health of many PSBs, in recent times it has been witnessed that alarming number of depositors have withdrawn their deposits. In this backdrop, as prevention is easier than cure, the government should initiate structural reforms to prevent their recurrence. 

Causes for bad lending-

The bad lending decisions of PSB’s in India are mainly attributed to the issues related to governance. Various governance issues like poor risk management and credit appraisal systems, dual regulation by the RBI and the finance ministry, political interference in lending and top level appointments, as well as the poor compensation and brief tenures of their boards etc are acknowledged as main causes of increasing bad loans.

Issue-

  • Though government constituted Bank Boards Bureau (BBB) under the leadership of former CAG, Vinod Rai but it has empowered to only address issues related to appointments of chairman and full-time directors. 
  • The BBB’s suggestions are also vetted, and sometimes turned down, by the finance ministry. Even the PJ Nayak committee on bank governance had envisaged the BBB only as an interim step in governance reforms. Hence there is need of larger reforms. 

Solutions-

  • There is urgent need to curb the political interference in the banks boards and they should be granted required autonomy to manage its affairs. So that political establishment should not use banks to gain political mileage. 
  • The Government transfer its holdings in public sector banks to a separate Bank Investment Company, an autonomous company under government of India and then dilute its equity stake to 50%. Such move will promote competitiveness among PSBs.
  • Government should take steps to professionalise PSB boards and make their employees that they are accountable to their consumers and shareholders.
  • Even central government can consider the legislative changes and modify reporting structures at PSBs so that they fall under the ambit of the Companies Act rather than the Bank Nationalisation Act for a level playing field with private firms.

Conclusion-  

The public sector banks are facing various issues, mainly the problem of non-performing assets. In current situation, the PSB’s are not able to find sufficient capital, given its fiscal constraints to nurse the distressed banks back to health and it has hardly reassuring for the same depositors. In this backdrop government should bring constructive reforms to make PSB’s viable and competitive.


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