Opinion | Putting public sector banks back on track3 min read . Updated: 10 Sep 2018, 06:51 AM IST
The complexity of the problem is again reflected in deliberations of the standing committee on finance and submissions made by various stakeholders
The Indian banking sector continues to struggle with higher non-performing assets (NPAs), particularly when it comes to public sector banks (PSBs). Much ink has been spilled on how to address this and roll back the adverse effects on productive sectors of the economy. This core problem is being addressed at various levels. There are a number of issues surrounding it that also need to be considered, however. The standing committee on finance, headed by M. Veerappa Moily, has done just that with its latest report.
The human resource problem is a good example. State-run banks are facing serious challenges on this front. A large number of senior employees will be retiring over the next five years; 95% of those at the general manager level will be out of the door by 2019-20. It will be a challenge to fill the resource gap at this scale without major changes in human resource policies. This, in turn, will also affect the governance and operational issues that have played into the NPA mess.
The complexity of such problems is reflected in the deliberations of the committee and submissions made by various stakeholders, including the Union government and the Reserve Bank of India (RBI). Some of the recommendations of the committee need wider discussion.
First, the committee has questioned the capital adequacy rules imposed by RBI, particularly for banks that do not have international exposure and are under the prompt corrective action framework. Relaxing the norms will improve their lending capacity and generate higher interest income. It is well accepted that higher lending capacity in the banking system will benefit the economy. However, relaxing capital adequacy norms, particularly for weaker banks, could be risky and affect financial stability. It is possible that these banks will end up accumulating more bad loans.
Second, the committee has suggested that RBI should consider separate treatment for NPAs arising due to wilful defaults and those because of external shocks, such as policy or judicial interventions. This is a slippery slope and could lead to unnecessary complications. In this context, the RBI has done well by not relaxing rules for power producers. Even if some loans have become non-performing because of external factors, there is no guarantee that banks will be able to recover money by holding on to them for an extended period. In fact, it is in the interest of banks to get out of such assets in a fair and transparent manner.
Third, to avoid large haircuts, the committee has recommended fixing a base price for bidding of assets under the bankruptcy process. This will again impede timely resolution. Fixing a floor price will affect price discovery and discourage bidders. It is important to recognize that the resolution system under the Insolvency and Bankruptcy Code (IBC) is still at an early stage and dealing with a large volume of cases.
Therefore, it is likely that valuations will be affected in the near term due to demand-supply mismatch. However, as the system stabilizes, outcomes are likely to improve for creditors. In this sense, the committee has done well to suggest that the capacity of the National Company Law Tribunal be improved.
Fourth, the committee has noted that banks lack the resource base and expertise to engage in long-term project financing. Therefore, the architecture of specialized long-term finance institution should be reconsidered. As this newspaper has argued in the past, the idea of long-term finance banks is worth trying. Specialized institutions will be in a better position to evaluate long-term projects. However, it will be important that they are designed well with a supportive regulatory environment. The earlier experiment with long-term finance institutions did not fully work as desired.
Fifth, as RBI has argued in the past, the central bank told the committee that it does not have adequate powers to control PSBs. The committee has recommended constituting a high-powered committee to evaluate the powers and authority of RBI, among other things. Since questions have been raised by the regulator and other stakeholders, it would be advisable to study the issue in detail, as it will help strengthen the overall regulatory architecture.
PSBs are currently dealing with difficult issues with no easy solutions. But the current situation is also an opportunity to undertake reforms and strengthen state-run banks. The new framework for the resolution of stressed assets and IBC will check accumulation of bad debt in the future. Concurrent with that, operations and governance in PSBs require reform. The committee believes that the present crisis is transitory. However, the future will depend on the way it is managed.
How important are governance reforms in PSBs? Tell us at email@example.com