PSBs will take minimum two years to regain health

PSBs will take minimum two years to regain health

By SHAILENDRA TYAGI | NEW DELHI | 12 March, 2016
‘The RBI wants the PSBs to clean-up their books by March 2017.’
Public Sector Banks are considered to be the lifeline of the Indian economy as 70% of financial intermediation and credit disbursal is done by them.
Public Sector Banks (PSBs), presently laden with huge non-performing loans, would take at least two years to regain the capabilities required to fund the economy. The expected economic turnaround in the meantime can certainly speed-up the process by helping banks to recover some of their bad assets, presently quantified at Rs 4 lakh crore, i.e the net write-off already done by banks. Such a colossal amount (of risky assets) is likely to go down the drain if the economy does not recover fast. Despite having favourable economic conditions (low commodities prices) and facilitating domestic policies, it would take about a year for banks to clean up their books. “That would be the beginning of their coming back to shape,” says Jagvinder Brar, partner, forensic services, KPMG India. PSBs are considered to be the lifeline of the Indian economy as 70% of financial intermediation and credit disbursal is done by the public sector banks.
Bad loans plaguing the entire banking sector have aggregated to over Rs 8 lakh crore with PSBs having a major share in it. Analysts say that such a scary picture had sent both threatening as well as inviting messages especially the one by the RBI asking PSBs to recognise their bad assets and make provisions for writing them off. “The RBI wants the PSBs to clean-up their books by March 2017,” says Brar. In the next one year, many state-owned banks would be busy recognising their Non-Performing Assets (NPAs) which is very likely to increase in coming quarters. Forensic audit of banks under suspicion of generously gifting away loans to defaulters (with worthless collaterals) might also throw up surprising results.
Brar strongly feels that while economic distress exaggerated bank distress, yet, a lot of it is due to diversion of funds done by many large borrowers. “I would say that about 30% to 50% of the loans extended by the state-owned banks were diverted towards other projects or other purposes,” says Brar. Many feel that Vijay Mallya is just a small example of large scale diversion that many big borrowers committed on suspected connivance with bank officials. The last time PSBs had suffered due to a large NPAs problem was in 2001 when systemic level NPAs — bank’s NPAs as a percentage of total advances — exceeded the current quantum of bad loans. This was corrected only when the economic cycle turned around later on.
The government is trying to professionalise the management of state owned banks and its decision to constitute the Bank Board Bureau has sent an assuring signal. Its decision to consolidate the PSBs would however, be fiercely resisted by the bank unions.
 

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