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

Context

• 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 overhaul.
• 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 performance-linked compensation.
• 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 government.
• 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.

Conclusion

• Apart from all this, the confidence that the Indian public and depositors place in banks seems to be taken for granted, amid every new crisis.
• 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.

  Online Coaching for UPSC PRE Exam

  General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) The Tanjore paintings are associated with the:
(a) Nayaka dynasty
(b) Kadamba dynasty
(c) Kalabhra dynasty
(d) Eastern Ganga dynasty

Answer: A
Mains Questions:
Q.1) The new government must get down to the task of governance reforms at PSBs. Comment.