Fixing the banking system

The banking system is floundering. The NPA burden, which seemed manageable a few months ago, threatens to get out of hand partly because the government has not moved decisively to fix the problems in the banking sector.

We are in a situation where public sector banks (PSBs) don't want to lend or are not in a position to lend to corporates. At the most, they may provide working capital. Project finance is a no-no. Like private banks, they are happy to seek to retail loans.

PSBs don't want to lend because they don't have enough capital and because of a pervasive fear psychosis. They don't have enough capital because they are unable to effect recoveries on loans (on which they have made provisions), because the government is not infusing enough capital into them and because they are not generating enough earnings for want of adequate credit growth.

How to get out of this low-level equilibrium? First, the government must provide them enough capital- and the Rs 70,000 crore earmarked under Indradhanush just isn't enough. Secondly, they must be empowered to effect recoveries but taking suitable hair-cuts on loans and seeing viable projects through to conclusion. This isn't happening because any banker who takes a loss on a loan exposure will be implicated as a 'scamster'.

Bankers are not going to do what it takes to get projects completed and effect recoveries until they have the assurance that they won't be hauled for writing off some portion of loan dues. I have been saying for long that an apex authority which vets all loan proposals is required, otherwise bankers aren't going to lift their little fingers. The news is that such an authority is being constituted. It will have to get cracking on large loans quickly.

Some banks don't have chairmen or MDs. The Bank Board Bureau must remedy these lacunae as fast as it can. Amidst all this comes the talk of the decision to merge SBI with its associate banks. This could well go down as one of the worst decisions in banking ever. SBI needs to focus on sorting its bad loan problem first. Trying to assimilate associate banks will drain the energies of the bank for at least two or three years- and even after that one is not sure of the outcome.

Make no mistake: the SBI merger has the potential to weaken one of the strongest banks in the country and a key pillar of the banking system. A good way for the next RBI governor to give an early demonstration of his independence and assert the RBI's autonomy would be to dissuade the government from staying with this ill-advised course.

More in my article, Banking revival must be a priority.

Also read Montek Ahuliwalia's article on the subject.