Banking reforms must be on the top of
the new govt’s agenda (The Hindu)
Mains Paper 3: Economy
Prelims level: NPA crisis
Mains level: Effects of NPA crisis on Indian economy
Lok Sabha campaign winds to a close, the Indian electorate can now heave
a sigh of relief.
It will have its task cut out to put the sputtering economy back on
track, which will mean taking up the unfinished agenda on economic reforms.
Reforms in banking must surely figure at the top of this to-do list.
After inheriting a banking system that was staggering under the weight
of undisclosed non-performing assets (NPAs), the incumbent government led by
the RBI, did manage to force banks to disclose evergreened loans and
provision for them. A new Bankruptcy Code was legislated to allow lenders to
take charge of the resolution process.
But beyond this, most of the energies have gone into fire-fighting
operational issues at public sector banks (PSBs) and scrounging up capital
to keep them afloat.
While investors and depositors can take heart from the worst of this NPA
crisis being behind them, they have very little assurance that a similar one
will not recur in future.
Prevent an encore of the NPA crisis
The structural reforms at PSBs are imperative on three counts.
One, the poor credit appraisal and risk management systems which led to
them concentrating their loans in a handful of borrowers need drastic
RBI recently imposed tighter curbs on the group-level and firm-level
exposures of banks, capping them at 40 per cent and 20 per cent respectively
of Tier-1 capital.
But such limits cannot substitute for the PSBs’ lack of in-house talent
in credit and project appraisal, which needs urgent fixing. RBI needs to
work on internal early warning systems that leverage analytics to head off
credit bubbles too.
Two, while mis-judgement can be condoned, strict enforcement action
needs to be taken against bankers who willingly colluded with corporate
borrowers to evergreen loans.
There’s also need for a thorough overhaul of recruitment policies at
PSBs, greater accountability from their top managements and Boards and
Three, political interference has played an egregious role in diverting
bank funds to crony capitalists.
Fixing this issue requires deep-rooted governance reforms that distance
the management and Boards of PSBs from their promoter the Central
A roadmap for the transfer and gradual dilution of the government
shareholding in PSBs is now critical, as is the strengthening of the
toothless Bank Boards Bureau.
RBI on its part needs to work through recent setbacks to the IBC process
to put it back on its feet.
Apart from all this, the confidence that the Indian public and
depositors place in banks seems to be taken for granted, amid every new
The new government must quickly get to the task of raising the deposit
insurance cover for retail depositors, which has remained at a measly ₹1
lakh for over two decades.