Relevance : GS Paper III
Theme of the Article
Acceleration in economic growth is not possible without addressing the problem of non-performing assets
Introduction
The new government will have to resolve India’s banking sector problem.
Non-performing Assets Data
- NPAs at commercial banks amounted to ₹10.3 trillion in 2018.
- Public sector banks (PSBs) accounted for 86% of the total NPAs.
Origin of the NPA crisis
- Credit boom in 2004-05 to 2008-09; Indian firms borrowed furiously.
- Most of the investment went into infrastructure.
- Thereafter, many things went wrong such as environmental clearances.
- Global financial crisis in 2007-08 and the slowdown after 2011-12
- Financing costs rose as policy rates were tightened in India
- The depreciation of the rupee meant higher outflows for companies that had borrowed in foreign currency.
- This made it difficult for companies to service their loans to Indian banks.
NPA problem more concentrated in PSBs
- PSBs had a higher exposure to the five most affected sectors — mining, iron and steel, textiles, infrastructure and aviation.
- PSBs accounted for 86% of advances in these five sectors.
Plans to prevent such Crises
- Wholesale privatization of PSBs is not the answer.
- One immediate action that is required is resolving the NPAs.
- Indian Banks’ Association has set up a panel to oversee resolution plans.
- Government must infuse additional capital needed to recapitalize banks.
- RBI needs to develop better mechanisms for monitoring.
- Action needs to be taken to strengthen the functioning of banks.
- Governance at PSBs, meaning the functioning of PSB boards, can certainly improve.
- Succession planning at PSBs also needs to improve.
Conclusion
The task of accelerating economic growth is not possible without finding a solution to the problems that confront the banking system.
