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RSTV – THE BIG PICTURE ANALYSIS
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.
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.
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.
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.
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.