Banking reforms must be on the top of the new govt’s agenda

| Updated on May 19, 2019

The new government must get down to the task of governance reforms at PSBs

As a prolonged and acrimonious Lok Sabha campaign winds to a close, the Indian electorate can now heave a sigh of relief. But the political party or coalition which takes over reins at the Centre will not have this luxury. It will have its task cut out to put the sputtering economy back on track, which will mean taking up the unfinished agenda on economic reforms. Reforms in banking must surely figure at the top of this to-do list. After inheriting a banking system that was staggering under the weight of undisclosed non-performing assets (NPAs), the incumbent government led by the RBI, did manage to force banks to disclose evergreened loans and provision for them. A new Bankruptcy Code was legislated to allow lenders to take charge of the resolution process. But beyond this, most of the energies have gone into fire-fighting operational issues at public sector banks (PSBs) and scrounging up capital to keep them afloat. While investors and depositors can take heart from the worst of this NPA crisis being behind them, they have very little assurance that a similar one will not recur in future.

To prevent an encore of the NPA crisis, structural reforms at PSBs are imperative on three counts. One, the poor credit appraisal and risk management systems which led to them concentrating their loans in a handful of borrowers need drastic overhaul. RBI recently imposed tighter curbs on the group-level and firm-level exposures of banks, capping them at 40 per cent and 20 per cent respectively of Tier-1 capital. But such limits cannot substitute for the PSBs’ lack of in-house talent in credit and project appraisal, which needs urgent fixing. RBI needs to work on internal early warning systems that leverage analytics to head off credit bubbles too. Two, while mis-judgement can be condoned, strict enforcement action needs to be taken against bankers who willingly colluded with corporate borrowers to evergreen loans. There’s also need for a thorough overhaul of recruitment policies at PSBs, greater accountability from their top managements and Boards and performance-linked compensation. Three, political interference has played an egregious role in diverting bank funds to crony capitalists. Fixing this issue requires deep-rooted governance reforms that distance the management and Boards of PSBs from their promoter — the Central government. A roadmap for the transfer and gradual dilution of the government shareholding in PSBs is now critical, as is the strengthening of the toothless Bank Boards Bureau. RBI on its part needs to work through recent setbacks to the IBC process to put it back on its feet.

Apart from all this, the confidence that the Indian public and depositors place in banks seems to be taken for granted, amid every new crisis. The new government must quickly get to the task of raising the deposit insurance cover for retail depositors, which has remained at a measly ₹1 lakh for over two decades.

Published on May 19, 2019

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like