Indian Banks highly in need of reforms: Is Privatisation the option?

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Indian banks are eagerly waiting for some reforms to happen as they are fighting each of the emergencies be it a pandemic or demonetisation. There are a lot of benefits associated with privatisation as it will make the banking industry more market disciplined and the structure will be more effective with proper control or regulations.

According to reports it is stated that the Indian banking industry is stable amidst the economic downturn and still there is a high need for some reforms to occur. The balance sheets of banks were already under stress before the pandemic hit and it became even worse when the moratorium time was extended thus created a deep hole in the pockets of bank revenue.

The vulnerability faced by scheduled banks and Public sector banks should be considered immediately. In the recent Financial Stability report published by Central bank of India, it is clear that the Non-Performing Assets are swelling from March from 8.5 per cent to 12.5 per cent which is again expected to rise to 14.7 per cent by March 2021. The ratio of a bank’s capital to its risk which is also called as Capital Adequacy Ratio (CAR) is predicted to deteriorate from 14.6 per cent in March 2020 to 13.3 per cent and then again to 11.8 per cent under this heavy stress by March 2021. The PSU Banks are towards more pessimism as the GNPA’s may increase from 11.3 per cent in March 2020 to 16.3 per cent by March 2021.

The RBI has proposed to cut down the government’s stake in six Public Sector Banks to 51 per cent in next 12 to 18 months. This reform can bring huge changes in the structure of incentives and culpability but can improve and bring in additional revenue. The efforts taken by the banks to cope up with emergencies one after another, may it be demonetisation, mergers or pandemic are very high and they do not have any spur to take risks and perform well as the government drives the taxpayers’ money from time to time. It is not just the case in our economy but a great threat faced globally. The reasons may vary for domestic and global threats as security concerns, supply chain disruptions are global reasons whereas the unprecedented economic crisis from the pandemic is the domestic reasons. As nobody can predict the duration of pandemic and it is remaining uncertain along with the vaccine is still a work in progress, the contraction of GDP, high fiscal imbalances due to lower incomes, high health expenditures are among the major fears.

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