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Photo: Hindustan Times
Photo: Hindustan Times

Opinion | Bank reforms must not be held off by this crisis

Regardless of covid impact, stake sales in public sector banks would be a good start. We also need other structural changes aimed at reducing government dominance of this vital sector

Sometimes, it does take a crisis to set things right. Recall the severe dollar crunch three decades years ago that prompted India to adopt free-market principles for its economy. Now, with covid-19 having wreaked havoc, magnifying almost every weakness of our economic system, we must turn our attention to a sector being counted upon by the Centre to keep thousands of enterprises afloat: banking. It remains dominated by public sector banks (PSBs), which have over two-thirds of all assets and seem poised to be hit by a sharp fall in loan repayments after the covid moratorium ends. A majority of their borrowers have deferred their pay-backs, but interest charges have been piling up and business conditions are so bad that a large chunk of them may not be able to meet their eventual obligations. By one estimate, PSBs may need nearly 90,000 crore in extra capital this fiscal year to keep going. Some of this could be raised if the Centre were to take the Reserve Bank of India’s (RBI’s) advice and reduce its stakes in six PSBs to 51% over the next 12-18 months. In Punjab National Bank, Union Bank, Bank of India and Canara Bank, the government’s stake is above 75%. In State Bank of India and Bank of Baroda, it is less. Still, in all, over 40,000 could be raised at current market levels.

The broad goal, though, should go far beyond arranging money to pump back into PSBs. The country needs them to perform better. Short of privatization, which could be placed on the agenda for later, one way to do this would be to keep their ownership apart from management by setting up an equity-holding company as a buffer between the two. This may grant managers more space to take prudent commercial decisions and compete with their private sector counterparts. If a holding company is given autonomy, it may also be able to judge which PSBs would serve the country better in private hands, and help the government withdraw from the sector bit by bit. To attract investors, these banks would need loan books that are easy to judge the quality of. As of now, they are suspected to be much too opaque, a problem worsened by the moratorium, an extension of which would make it even harder to obtain clarity. As senior bankers in the private sector like Deepak Parekh of HDFC and Uday Kotak of Kotak Mahindra Bank have cautioned, deferring repayments beyond their expiry date of 31 August could create more problems than it solves. Many business debtors do deserve relief, but this can be done through a rejig of their loan terms. As for borrowers that cannot be saved and are bound to default, it is best to know of their trail of bad debts well in time. This would grant the government time to address a PSB crisis before it assumes unmanageable proportions.

Delayed recognition of the inevitable has haunted India’s financial sector for decades. In a country where capital is scarce and its cost relatively high, money has higher “time value" than elsewhere. This puts a premium on resolving debt problems quickly. But, as former RBI Governor Urjit Patel has argued, policymakers face a trilemma. The sector cannot have PSB dominance under independent regulation—which makes bad debts hard to hide—and also expect these banks not to drain public resources. If RBI supervision must not let distress stay hidden and taxpayers must be spared the bill of bad assets, then the government must let PSBs out of its clutches.

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