CONTEXT:Public Sector Banks (PSBs) are in dire condition, and the Government of India is the only saviour.
Challenges faced by PSBs:
Structural Challenges:
Over-reliance on one stakeholder: since the Government of India is the primary investor.
Unlike Private banks, which can raise funds from various sources such as capital markets.
Failing at mission to serve the poor: Instead, more than half of all loans are given to big borrowers.
These large borrowings account for more than three-fourths of all bad loans in PSBs.
Maintaining the status quo on reforms: Since no action has been taken on PK Nayak expert committee report on PSB reform.
Revival challenges:
Recapitalization concerns: Rs.2 lakh crores are needed according to Moody’s forecast
Difficult for the government due to already soaring fiscal deficit at 7.2% of GDP.
Disinvestment issues:
Short on disinvestment target: Even during boom years due to red-tapism.
Government interference: Government stake will be 26%, which is a cause of concern for private players due to apprehensions regarding government interference.
Pre-COVID stress: in sectors such as automobile, real estate and power sector even before COVID.
Restructuring: of loans will only result in impending defaults in bank books.
Falling Market share:
Total Loan: In PSB fell from 73% in 2008 to 60% in 2019-20.
Incremental Loan: Share of PSB fell even drastically from 75% in 2012 to 20% in 2019.
Low growth in market value: Market value of PSB rose by 40% since 2008, while that of private banks shot up by 400%.
Market Aversion: Foreign and domestic institutions shy away from holding funds in PSBs.
Way Ahead
Renewed Stakeholders: New management and human capital will bring capital, energy, enthusiasm and vision.
Dedicated approach to privatization: Revival of PSBs, that influence two-thirds of the financial sector.