The Finance Ministry has decided not to urge the Reserve Bank of India to relax its prompt corrective action (PCA) mechanism, but this can scarcely address the real issues like non-performing assets (NPAs) or bad loans. Neither the PCA nor any other framework can cure the banking sector, for the problem is structural rather than functional: it is the government ownership that is at the heart of the rot. Which also explains why state-run have the highest NPAs.
"Finance Minister Piyush Goyal last week met heads of 11 public sector banks (PSBs) which have been identified under the PCA to check their deteriorating financial health and promised all possible help to strengthen them," PTI reported on May 21. The 11 PSBs are Dena Bank, Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, and Bank of Maharashtra.
The intentions are indeed good but then good intentions are not sufficient to get desired results; for though the PCA can be a curative step, it cannot be the cure, let alone a panacea.
Capital, asset quality, and profitability are “the key areas for monitoring” in the PCA, according to the RBI. “Leverage would be monitored additionally as part of the PCA framework.” The operations-related measures under the PCA include: restrictions on branch expansion plans, domestic as well as overseas; reduction in business at overseas branches/subsidiaries/in other entities; curbs on entering into new lines of business; reduction in leverage through reduction in non-fund based business; reduction in risky assets; constraints on non-credit asset creation; and limits on undertaking businesses as specified.
Since lending is the lifeblood of an economy, such curbs on banking would end up constraining business activities, and this adversely affect growth. Most recently, the RBI barred the state-run lender Dena Bank from extending fresh credit. “We wish to inform that the RBI, vide their letter dated May 7, 2018, has restricted the Bank from assuming fresh credit exposure and recruitment of staff,” Dena Bank said in a notification to the stock exchanges.
The bank posted Rs 1,225-crore loss for the January-March quarter, up from Rs 575.26 crore in the same period 2016-17. For 2017-18, it had reported a net loss of Rs 1,923.15 crore. That was the third consecutive year of incurring losses.
Meanwhile, the largest lender State Bank of India (SBI) reported a net loss of Rs 7,718.17 crore in the fourth quarter previous fiscal, which is more than double of the loss of Rs 3,442 crore in the corresponding period in 2016-17.
In general, Indian banking, over two-thirds of which is in the public sector, is in a mess. The real problem, as we mentioned earlier, is the ownership of PSBs. Unless the ownership is changed—that is, PSBs are privatised—there is little possibility of having a robust banking system.
Within the public sector framework, various schemes have been tried; none has succeeded. For instance, the Banks Board Bureau (BBB) was set up in February 2016 under former Comptroller & Auditor General Vinod Rai. Let alone cure the system, it even failed to detect the Nirav Modi-Mehul Choksi scam.
Earlier, in August 2015, Finance Minister Arun Jaitley had launched a seven-pronged plan, Indradhanush. Its components comprised improved method of appointments, a BBB, capitalisation, de-stressing, empowerment of bankers, framework of accountability, and governance reforms. In February 2017, the government was reported contemplating even Indradhanush 2.0, which was an attempt to have a recapitalisation programme in tune with the global capital adequacy norms, Basel-III.
Policy and opinion makers have also toyed with the ideas of bank mergers and a bank-holding company—to no avail. NPAs continue to rise; unscrupulous businessmen like Nirav Modi and Vijay Mallya continue to fleece PSBs with impunity; and the NPAs of PSBs keeps rising and their performance falling. For instance, the return on equity (ROE) of PSBs was -2.8 per cent in 2016-17, whereas that of private banks was 12 per cent. NPAs in PSBs climbed from 5.43 per cent (Rs 278,466 crore) in March 2015 to 13.69 per cent (Rs 733,137 crore) June 2017. Further, PSBs have written off NPAs Rs 360,000 crore in the last 10 years.
In the last 11 years, government after government has spent Rs 2.6-lakh crore taxpayer money in the name of PSB recapitalisation. This is apart from the Rs 2.11-lakh crore recapitalisation announced by the Narendra Modi regime to be spent in 2017-18 and 2018-19.
This is inexcusable against the backdrop of woefully inadequate defence budget and the high fuel prices the common man has to pay through his teeth. Commonsense, reason, facts, everything suggests that PSBs be sold off so that the taxpayer’s burden is reduced, banking gets revived, and consequently the economy receives an impetus.
(Ravi Shanker Kapoor is a journalist and author. He has spent around 25 years in the media. As a freelance journalist, Kapoor has written for a number of leading publications. He has written four books on Indian politics and its associated institutions.)
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL.)