Public Sector Banks must move beyond recapitalization bonds 

News:  Recently, the public sector banks (PSBs) had a huge amount of gross non-performing assets (NPAs) or bad loans. It peaked at ₹8.96 trillion or around 14.6% of total loans in March 2018. However, the gross NPAs have fallen to ₹5.59 trillion, or around 7.9% of total loans as of December 2021. 

What are the challenges before PSBs? 

The PSBs have constantly been losing market share to private banks due to competition since 2010. 

For example, the PSBs share in overall outstanding loans has been reduced from 3/4th in 2010 to 55% in 2021. However, the share of private banks having risen. 

What factors have contributed to decline in the bad loans? 

There has been writing off of the bad loans, the recurrent recapitalization of PSBs by the government, the recovery of a few bad loans, and the RBI pushed the prompt corrective action (PCA) framework 

– Over the years, the bad loans of PSBs had been written off against their accumulated capital.  

Recapitalization: The government had regularly invested fresh money in them. From 2010-11 to 2017-18, the Centre infused ₹1.12 trillion.  

In order to put fresh money into PSBs, the government has issued recapitalization bonds worth ₹2.79 trillion so far. The bank bought these bonds. The Centre took that money and re-invested it back in the bank. Such bonds recapitalized the banks which were running short on capital. It also prevented the government from spending any money from its budget.   

Way Forward 

The RBI Governor asked the banks to strengthen their lending capacity by raising capital. Banks are being encouraged to raise capital from sources other than the government. This is so because at present the government’s shareholding in addition to LIC stands at 73% in PNB, 64% of Bank of Baroda and 80% of Indian Bank etc. However, the banks should not dilute the centre’s share below the minimum requirement of 51%.     

The Second Narasimham Committee 1998 recommended that the minimum shareholding of the government in PSBs be brought down to 33%. It will ensure that the PSBs stay in competition. 

Source: The post is based on an article “Public Sector banks must move beyond recapitalization bonds” published in the Live Mint on 27th April 2022.