Earnings reports from the banking sector suggest that the worst is not yet over in terms of asset quality—and rising stress, particularly in public sector banks (PSBs).
In the stock market, shares of PSBs are getting hammered and most of them are now trading significantly below their book value.
At a broader level, the need for a well-functioning and well-capitalized banking system cannot be overstated; rising stress will affect the ability of PSBs to fund the rising capital requirements of a growing economy.
This is not the first time that PSBs find themselves in a spot. The government, despite serious financial constraints, has promised to infuse capital in these banks. But this is not a long-term solution.
PSBs’ problems are well understood and go beyond business cycle issues. It is time structural issues in managing these banks are proactively addressed in order to improve efficiency in capital allocation and to avoid recurring fiscal cost.