Reviving public sector banks isn’t over with capital infusion

The 2020 Union Budget must be the first one in recent years where scrounging up money for a public sector bank (PSB) recapitalisation package doesn’t top the agenda for the Finance Minister. Having infused ₹2.7 lakh crore into PSBs over three years, government sources have indicated that recapitalisation may not even figure in the Budget proposals this year, given that PSBs have already provisioned for the bulk of their bad loans and will likely see more recoveries from bankruptcy proceedings. Ongoing PSB mega mergers which seek to consolidate smaller PSBs are also designed to help troubled banks meet their capital needs without a helping hand from the Centre. However, the Government cannot afford to take the view that its role in putting PSBs back on their feet is done and dusted with its generous infusions of taxpayer money into PSBs. An even more critical task lies ahead, that of initiating ownership and governance reforms at PSBs so that there’s no repeat of the previous cycle.

There are three areas in which this Government has its task cut out. One, while the new Insolvency and Bankruptcy Code and Fugitive Economic Offenders Act have made it harder for rogue promoters to default on bank loans and go scot-free, not much has been done to address shortcomings at the bankers’ end which were equally culpable for the NPA mess. Political string-pulling on lending, combined with the lack of autonomy and weak Board oversight were the key factors behind the disastrous lending decisions. The only permanent solution to this problem is to ring-fence PSB management appointments from Central government interference and eventually prune government stakes in chosen PSBs. It would be good to see measures to empower the lame-duck Bank Boards Bureau and a roadmap for stake dilution in the upcoming Budget. Two, as PSBs have focussed on cleaning up their books, they’ve lost the plot on customer service and ceded significant market share to private rivals on both CASA balances and retail lending. To arrest this slide, PSBs now need to focus on quicker digital adoption and a friendlier customer interface which may need both investments and an across-the-board talent refresh. The NDA regime also needs to rein in its tendency to interfere in the commercial decisions of PSBs, by co-opting them into social causes such as MUDRA loans and MSME loan melas .

Finally, even as the pain from ill-judged project loans is beginning to abate, Indian banks are being battered by a new wave of loan, card and technology frauds that are rising rapidly in value. RBI data show that bank frauds in the first six months of FY20 at ₹1.13 lakh crore had already overshot the FY19 figure by 57 per cent. PSBs account for the bulk of loan frauds. Unless the reasons for this spurt are diagnosed and promptly plugged, the Centre may find itself writing out cheques for further rounds of capital infusions against new bad loans in the coming fiscal.

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