11/05/2019 - Economy

May 11, 2019
3 months

The task of accelerating economic growth can be made possible by finding a comprehensive solution to the problems that confront the banking system. Elucidate(200 Words)

Refer - The Hindu

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IAS Parliament 3 months


Problems of Banking system

·        The primary reason for increasing Non-performing assets in banking system is the credit boom of the years 2004-05 to 2008-09.

·        It was a period in which the world economy as well as the Indian economy  were booming. Indian firms borrowed furiously in order to avail of the growth opportunities they saw coming.

·        Thereafter, the Economic Survey of 2016-17 notes that problems in acquiring land and getting environmental clearances, several projects got stalled. Their costs soared.

·        At the same time, with the onset of the global financial crisis in 2007-08 and the slowdown in growth after 2011-12, revenues fell well short of forecasts.

·        Financing costs rose as policy rates were tightened in India in response to the crisis. The depreciation of the rupee meant higher outflows for companies that had borrowed in foreign currency.

·        Higher NPAs mean higher provisions on the part of banks. Provisions rose to a level where banks, especially PSBs, started making losses. Their capital got eroded as a result.

·        Since the problem is more concentrated in PSBs, Public ownership of banks, according to them, is beset with corruption and incompetence (reflected in poor appraisal of credit risk). The solution, therefore, is to privatise the PSBs, at least the weaker ones.

·        But the infrastructure projects were impacted by the global financial crisis and environmental and land acquisition issues. In addition, mining and telecom were impacted by adverse court judgments.

·        Steel was impacted by dumping from China. Thus, the sectors to which PSBs were heavily exposed were impacted by factors beyond the control of bank management.

Plans to prevent such crises

·        The government must infuse at one go whatever additional capital is needed to recapitalise banks — providing such capital in multiple instalments is not helpful.

·        RBI needs to develop better mechanisms for monitoring macro-prudential indicators, a simple indicator would be a rate of credit growth.

·        Actions needs to be taken to strengthen the functioning of banks in general and, more particularly, PSBs.

·        Overall risk management at PSBs needs to be taken to a higher level. This certainly requires strengthening of PSB boards. We need to induct more high-quality professionals on PSB boards and compensate them better.

·        Succession planning at PSBs also needs to improve. Despite the constitution of the Banks Board Bureau to advise on selection of top management.

·        The appointment of Managing Directors and Executive Directors continues to be plagued by long delays and must end.