The latest financial stability report (FSR) of the Reserve Bank of India highlights the worsening state of India’s banking sector. To a great extent, the story is about the poor financial state of public sector banks, which account for almost 70 per cent of the total assets in the banking space. Close on the heels of the mid-year economic review, which showed that economic growth is decelerating, the FSR paints a grim picture. “The banking stability indicator shows that risks to the banking sector increased since the publication of the previous FSR, mainly on account of deteriorating asset quality, lower soundness and sluggish profitability,” it says. Just between March and September this year, net NPAs as a percentage of total net advances have increased to 2.8 per cent from 2.5 per cent. The public sector is the biggest culprit, by a large margin. PSBs have recorded the highest level of stressed assets (14.1 per cent), much higher than in the private sector (4.6 per cent) and among foreign banks (3.4 per cent). What this means is that, on the one hand, growth is faltering and on the other, the main financiers of a possible recovery are sinking deeper in trouble.
The health of the banking sector started worsening since 2011, in the aftermath of the financial crisis. The problem lies with the way PSB boards are run. There is enough evidence — including in the P.J. Nayak committee report released last year — to prove that in comparison to private sector banks, PSB boards are neither driven by the profit motive nor developmental concerns. The problem lies in the way the bank board members are appointed and the ways in which they function. Research shows that the number of risk-related issues discussed by PSB boards is negatively correlated with the net NPAs (as a percentage of advances).
On the face of it, the NDA government has taken steps to remedy the situation. At the start of the year, Prime Minister Narendra Modi made it clear that political interference will be brought down. In August, the government launched “Indradhanush”, a seven-point action plan, to reform the regulatory framework. But, in reality, there has been no real structural reform, like diluting the government’s stake in PSBs to below 51 per cent and letting them function more freely. The FSR shows that the delay in ushering in reforms is beginning to take a toll. If some action is not taken soon, India’s growth story will be hurt further.
- See more at: http://indianexpress.com/article/opinion/editorials/rbi-india-banking-sector-fsr/#sthash.ll6W8dfx.dpuf
Courtesy Indian Express News
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