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Recapitalizing public sector banks and tackling NPAs – current issues and future possibilities

The Government of India's decision to recapitalize public sector banks is a positive step in the right direction to improve financial health. However, there is need to revisit history and look at the last two decades. In both the previous instances, the then governments had taken similar action. The moot question that needs answering: Why are these instances resurfacing? On analysis, we find that the government's decision is not addressing the inherent problems of PSU banks. The causes vary: from inefficient project appraisal and tracking systems in the lending process to lack of independence / operational freedom for bank boards to the laidback work attitude of the staff, long-drawn legal battles to solve NPAs, and multiple instances of loan waivers by various state governments. On the part of RBI, it has been discharging its responsibility of tracking and measuring the NPAs and the processes for solving NPAs.

Most public sector banks have NPAs of over 20%; for instance, Indian Overseas Bank (23.6%) and IDBI (over 24%). As of June 2017, total NPAs in the Indian banking system stand at INR 8,29,338 crore, recording an increase of over 16.6%. The trend is worrisome, if one studies RBI's statistics regarding gross NPAs as a percentage of a bank's net worth or capital and reserves. During 2012 it was 18% for all the public sector banks put together and has been rising exponentially over the years. In case of public sector banks it has risen to 76% and for 7 banks it is more than 100%. If we compare this with private sector banks, we find their NPAs are much lower. While for Axis Bank the net NPAs are at 15% of net worth, in case of ICICI Bank the figure is 25%.

For India, the health of financial and banking systems is of utmost importance since they anchor the developmental journey. Hence it is imperative for the government to initiate structural reforms that can address: consolidation of public sector banks, providing operational freedom to banks, freedom to deal with people matters, improving systems and processes, privatization of ailing banks, and strengthening of legal framework to fast track resolution of NPAs. Else it will be akin to a scenario where a doctor carries out the dressing of surface wounds, while there is an internal injury.

The article is written by Dr. Venkatesh Naga, Professor, Goa Institute of Management.

Dr. Venkatesh Naga has over two decades of HR functional / academic and consulting experience across Logistics (GATI), Banking (ING Vysya, HSBC), IT / ITeS (IDRBT / SITEL) and Social (Akshaya Patra) sectors. He has worked as Head - HR and Head - Talent & Learning and has managed employee strengths of 7000+ across geographies.