Is the endgame for NPAs in sight?

Is the endgame for NPAs in sight?

Context:

• The bank frauds involving Punjab National Bank (PNB) and the associated companies comes at the time when  the Indian banking system is already reeling under the pressure of growing NPAs, or non-performing assets which will touch nearly Rs. 10 lakh crore by March this year.

Reasons of bank frauds involving Punjab National Bank (PNB) and the associated companies:

• The PNB scam relied on the existence of an unusual financial instrument, the letter of undertaking (LoU).
• These LoUs which are equivalent to providing credit and should be recorded as contingent liabilities were not so recorded.
• Also, senior management and auditors did not track these problematic transactions for years.
• The Reserve Bank of India (RBI) did not monitor banks properly and created opacity with new financial instruments.
• The Finance Ministry failed in its oversight and regulation.
• And successive Central governments, including the present one, did and have not done anything to address the obvious problems that were festering, and made them even worse.
• The RBI may have been too occupied in counting old currency notes and dealing with the other damaging consequences of demonetisation to pay enough attention to its real job — of bank regulation.

Impact of bank frauds involving Punjab National Bank (PNB) and the associated companies:

• Many analysts within and outside government have responded to these scams by pointing the finger at public sector banks, claiming that they are more vulnerable to influence peddling and crony capitalism.
• The current mess has also become an excuse to demand the privatisation of state-held banks.
• But, poorly regulated private banks are even more prone to scams and failure as the financial sector is rife with information asymmetries and market imperfections.