Answer:
PSBs face multiple concerns related to their performance regarding declining profits, deteriorating asset quality, risky capital position and poor governance. On top there are problems of corruption and human resource which have exacerbated these concerns. The reasons for the poor performance are multi-dimensional.
♤ The economic slowdown in recent years has affected prime borrowing sectors of PSBs i.e. iron and steel, infrastructure, aviation and mining. PSBs are often forced to lend to the unviable projects of these sectors, leading to a rise in NPAs. NPAs require greater provisioning and reduce the bank’s capacity to lend to productive sectors.
♤ The corporate debt restructuring of bad loans of companies leaves the PSBs in a poor financial position. This also hides the magnitude of the imminent problem.
♤ The poor performance of PSBs is also seen as a governance issue. The appointment of heads of banks involves lobbying by vested interests and is often delayed.
♤ Dual regulation by RBI and the Finance Ministry has left little autonomy for PSBs.
♤ Interference by the vested interests has pervaded a culture of non-compliance of best practices to evaluate feasibility of loans and undertaking proper KYC.
To enhance their performance, the government has initiated the Indradhanush framework. This comprehensive effort will focus on seven critical areas of
o appointments,
o setting up a Bank Board Bureau,
o capitalization,
o de-stressing PSBs and strengthening risk control measures,
o empowerment of bank management,
o development of a Framework of Accountability, and
o governance reforms.
♤ The RBI has issued guidelines for quicker recognition and resolution of stressed assets. It has developed a Corrective Action Plan for recovery or sale of unviable accounts. It has lightened norms for Asset Reconstruction Companies by increasing cash stake of ARCs in assets purchased by them. These measures are expected to tackle the issue of increasing NPAs.
Issues in consolidation: The current weak economic environment makes the consolidation process risky because of a high number of stressed assets.
On the other hand, apart from a balance sheet size increase (SBI’s will be Rs.37 lakh crore post merger, and push it into top 50 globally), synergies in business and treasury operations, branch rationalisation and the access to tap into cheaper funds are expected to prune the merged entity’s costs. This will result in efficiency gains and higher quality of services.
Bank consolidation should not be done to overcome short-term problems faced by certain PSBs. Further, existence of large sized banks will have systemic and moral implications as it may require government bailouts during time of stress.
The government should take into mind the risks involved and take steps accordingly. Creating large banks should not be the sole objective and it must be ensured that consolidation is carried out in a well calibrated manner.