For a long time, we have been crashing with the news of how Public Sector Banks (PSBs) are covered with turmoil, especially after the fraud of Punjab National Bank. There have also been talks about merging PSU banks, but finally, Government has taken a pause to eliminate all such possibilities as of now.
Reform agendas over bad loans
Bad loans and Non-performing Assets (NPA) have always been the concern for the public sector banks, and thus the government wants those state-run banks to first gain stabilisation by resolving bad loans issues. After that obviously, the consolidation plan would be on its mark.
As per the reforms agenda, most of the banks are currently abiding the new guidelines which deal with bad loans. The reform also includes measures for prudential and clean lending, enhanced credit availability and better governance. Thus, once this cleansing process would be over, state-owned banks would come out as stronger entities and then the government will look for their consolidation.
The government has also broken silence on IDBI bank’s privatisation, stating this time not to be the correct time to do so. At present, the bank is under the prompt corrective action plan of Reserve Bank of India. IDBI has been allotted a reasonable amount under the bank capitalisation programme, and in addition to that, the bank is also looking to sell its non-core assets to raise capital and strengthen itself. It’s noted that IDBI bank has got the highest amount of Rs 10,610 under the recapitalisation plan and thus the government looks to make it stronger.
The mechanism of PCA framework
There are some experts having views about a speedy consolidation of PSBs, stating the bad loans issue can be solved under the bankruptcy code, and thus the merger of PSBs should be done on a priority basis.
On the other hand, the government is looking for strengthening banks. One of such move is the framework of Prompt Corrective Actions (PCA) under RBI. It aims to encourage banks to stop taking certain activities that are great at risk. Also, banks have been asked to concentrate on conserving capital so that their balance sheets can be intensified. Currently, there are eleven state-owned banks under PCA framework which includes, Dena Bank, Central Bank of India, Bank of Maharashtra, UCO Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Corporation Bank, Bank of India, Allahabad Bank and United Bank of India.
In addition to that, the government in January has introduced Enhanced Access and Service Excellence agenda, under which banks will have to create monitoring agencies to look after loans above Rs 250 crores and a provision vertical for non-performing assets would be mandatory, apart from selling the non-core assets.
Comprehensive plan forward
In the Nirav Modi case, banking instruments like Letters of Undertaking (LoU) and Letter of Comfort (LoC) were highly misused. To prevent it in future, the Government is monitoring them very closely. There stand to be some responsibilities at the end of PSBs as well, and thus in the coming six months, a series of steps are going to be implemented by them for a robust and secure risk management mechanism. That also includes the integrating SWIFT with the core banking system by 30th April. These measures hint that the Government is definitely trying to be restrictive for banks to prevent more losses. At the same time, the statements were given, and the steps taken show no possibilities of the merger of public sector banks, it seems more like stabilising banks and reestablishing the trust of people in the banking system again.
P.S- The article was originally published in The Qrius (Formally the Indian Economist)
By Devanshee Dave