Hope fades for PSBs

Source: Business Standard

Relevance: Resolving problems faced by PSBs

Synopsis: Govt cannot keep infusing capital constantly. Hence privatization of PSB’s will be the ideal route.

Background:

• Public sector banks (PSBs) are reported to have written off about Rs 8 trillion worth of loans over the last seven years.
• It is more than twice the Rs 3.37 trillion capital infused by the government in the same period.
• The last four years have been particularly bad for PSBs as they wrote off loans worth over Rs 1 trillion every year.
• This is clearly an unsustainable position, and the government cannot constantly keep infusing large sums of capital into the banking system.

Why government need to recapitalize PSB’s?

• Most PSBs command low valuations and are not in a position to raise capital from the market.
• This forces the government to keep infusing funds at a time when it needs to increase public spending to support the economy affected by the pandemic.
• Not infusing capital will affect the flow of credit to the productive sectors of the economy, which will delay full economic recovery.

Increasing Bad loans

• Bad loans started rising during the early part of the last decade as a result of excessive lending, both before and after the global financial crisis.
• Owing to the impact of the Pandemic, the gross non-performing assets (GNPAs) for PSBs are expected to go up to 12.52 per cent by March 2022, according to the Reserve Bank of India (RBI).
• The government has taken several steps to improve the functioning of state-run banks, but they don’t seem to have had any significant impact.
• The government has also put in place a bankruptcy law, which has strengthened the position of lenders though the recovery has been muted so far.

Reasons for Bad loans

• The RBI conducted an asset quality review during 2015-16, which led to a surge in bad loans.
• One of the big reasons for higher stress in PSBs is their inability to properly evaluate businesses and track progress.
• Further, bankers in the public sector are reluctant to recognise bad loans in time because of the fear of investigative agencies.

Way forward

• Since it is clear that there are limits to the extent PSBs can be reformed and are likely to remain a drag on government finances, the government should speed up their privatisation.
• The government intends to privatise two PSBs in the current fiscal year and the NITI Aayog has reportedly made its recommendations.
• Immediate steps must be taken to take this forward and make way for privatising more banks in the coming years.
• This will not only help strengthen the banking system but also allow the government to stop throwing good money after bad.