Earlier PSU banks come out of crisis the better
Reserve Bank of India Governor Raghuram Rajan is quite right in observing that the banking sector, hit by the non-performing assets crisis, needs surgery, not Band-aid treatment. Struggling with the burden of mounting unpaid loans worth several lakh crores of rupees, public sector banks reportedly wrote off more than one lakh crore rupees in the last three years. The Government told Parliament in July last year that bad loans in public sector banks had seen a jump to Rs 2.66 lakh crore from Rs 2.16 lakh crore a year before. He added ominously that the “NPA of (public sector) banks is increasing continuously”. The gross NPA ratio of these banks had increased to 5.43 per cent by March 2015 end, as compared to 4.72 per cent a year before that, he informed. The Union Ministry of Finance along with the RBI has been grappling with ways to tackle the growing menace and it is expected that the forthcoming Budget will throw up some roadmap in the form of restructuring loans. But Mr Rajan’s prescription of a surgery must be taken seriously because writing off bad loans is a lazy way out. It may work in cleaning up the balance-sheets but does nothing to tackle the root causes. One of them is, of course, the downturn in global and domestic economies that we had witnessed in the past few years, leading to stress in various industrial sectors, making it difficult for industrial enterprises to repay their loans. NPAs accumulated in such situations can be managed with a positive turnaround of the economy and industrial activity picking up — something that we should see happening in full measure following a joint effort by the RBI and the Finance Ministry. The real problems have to do with the lack of due diligence by authorities in the public sector banks in the disbursement of loans and the erratic conduct of loanees (the large ones). Public sector banks have to be more careful in the disbursement of major loans to organisations and individuals and not get carried away by the halo which often surrounds high-profile customers. It must also get cracking in the recovery of bad debts from major players; petty beneficiaries are dealt with decisively when they fail to honour a couple of loan installments while the bigger ones are given leeway beyond what they deserve. There are several cases of high-profile loanees who have been getting away by playing truant. One unfortunate fall-out of the mounting NPAs is that they have made the stressed banks reluctant to lend for even viable purposes. This can adversely affect the entrepreneurial spirit the Government hopes to unleash.
Mr Rajan’s optimism that the crisis is not unmanageable, yet, because public sector banks have demonstrated the desire to combat the NPA issue effectively in collaboration with the Government and the RBI, will both boost the banking sector’s morale and set to rest apprehensions that there will be a needless squeeze in bank funds for economic development.