Untenable Status Quo

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.