Daily Analysis

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RSTV – THE BIG PICTURE ANALYSIS

BANKING SECTOR OVERHAUL

The Editorial covers GS paper 3 [Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.]

Banking Sector Reforms – Civilsdaily

Context

  • A working group at the RBI has recommended a series of changes that could transform the country’s banking landscape by paving the way for large industrial conglomerates to set up banks. 

  • The proposals could also allow large non-banking finance companies and niche payment banks to convert into lenders.

What is the Background?

  • In a report made public on Friday, the committee recommended that banking regulations be amended to allow large industrial houses to act as so-called bank promoters, meaning they could take a significant stake in a lender, something the central bank has strongly resisted in the past. 

  • As well as opening up the banking sector, the committee suggested adjusting the size of the stakes major shareholders can hold in a lender.

What are the highlights?

  • For investors not involved with the bank at the outset, or non-promoter shareholders, a uniform cap of 15% instead of a current tiered structure was suggested by the committee, which was formed in June to review ownership guidelines and the corporate structure of Indian private sector banks. 

  • It recommended increasing the size of the stake that promoters in private banks can hold to 26% from the current 15% over a 15-year time frame. 

What are the contributions of PSBs?

  • PSBs expanded agricultural credit, short term agricultural credit (‘crop loans’), both of which in 2017-18 is projected to total Rs 622,685 crores.

  • It pioneered the concept of ‘priority sector lending’, which opened up many sectors deprived of banking credit to access loans.

  • Differential Rate of Interest (DRI) loans to the very poor was also the brainchild of public sector banking.

  • PSBs extended loans to women’s self-help groups that totalled to Rs. 61,600 crores per annum, which is significant for women empowerment.

  • PSBs funded rural infrastructure through the Rural Infrastructure Development Fund and pioneered financial inclusion.

What is the way forward?

  • In order to improve the governance and management of PSBs, there is a need to implement the recommendations of the PJ Nayak committee.

  • There is a need to follow prudential norms for lending and NPAs can be tackled through the establishment of the bad bank and speedy resolution of NPAs through Insolvency Bankruptcy Code.

  • Managers should be held accountable for operational performance and there should be constant monitoring of targets, risk assessment, and credit controls.

  • The clean-up of bank balance sheets and the overhaul of India’s archaic insolvency law are steps in the right direction.

  • Rather than blind privatisation, PSBs can be made into a corporation like Life Insurance Corporation (LIC). 

  • While maintaining government ownership, this will give more autonomy to PSBs.

Conclusion

  • The Privatisation of PSBs is not going to be easy, as it would involve building consensus amongst various stakeholders, including unions and parliament-arians. 

  • Further, Bank privatization, without strengthening regulatory controls and improving governance, won’t prevent fraud or curtail undue exposure to risk.