Untenable Status Quo

Business Standard     23rd September 2020     Save    
QEP Pocket Notes

Context: A sustainable recovery from the pandemic induced economic contraction will, to a large extent depend on the ability of the banking system/Public sector Banks (PSBs). 

PSBs of India

  • The present situation of PSBs is fiscally untenable
    • Gross NPAs of PSBs are set to go above 15% by the end of the current financial year.
  • PSBs would not be able to support the economic recovery and are in need of reforms.

Prescriptive Reforms for PSBs

    • Ensure operational independence to the PSB boards and strengthen incentive structure for the management. 
  • Create distance from operation and improve governance by lowering down government ownership to below 50%.
    • Government ownership can be used to push up economic activity in the short run for political reasons.
  • Privatise selected PSBs in a careful and calibrated manner.
  • Setting up a bad bank as a public sector entity for resolving bad debt will release PSBs from the questioning of investigating agencies for selling PSB assets.
    • PSBs are often unwilling to recognise losses because of the fear of investigative agencies.
  • Create a more liquid market for distressed loans to address pricing concerns.
    • PSBs may not be able to participate freely in a liquid market at the initial stage.

Conclusion: The transformation of the banking sector can´t happen through incremental reforms.

QEP Pocket Notes