Is taking Public out of Public Sector Banks the solution?

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State-run banks or PSBs have been under stress for long.  The Non-Performing Assets (NPA) issue has been eroding the Banking system and the Financial system of the country as a whole and shrinking the space for Banks to pass on the buck when it comes to decreasing interest rates by the Central Bank of India. In spite of the various schemes announced by the Government of India as part of the stimulus package to stimulate growth in Micro, Small & Medium scale Enterprises (MSMEs) & Public Sector Undertakings (PSUs), the banks have been reluctant to give loans due to the fear of them turning out to be NPAs in future.

Governance has been seen as one of the root causes of this apathy of the State-run banks and the NPA mess. In order to address the issue of NPAs and to correct the teething problems in governance, the government of India had decided to merge ten state-run banks into four big lenders. The four big lenders in which they will be merged into are Punjab National Bank, Canara Bank, Union Bank of India and Indian Bank. It came into effect from April 01, 2020.

There has been a need to separate the governance or in other words the controlling of the state-run banks from the government. This can be done by doing away with the nationalization laws from where the executive derives its power. Privatization of these banks needs a larger political will and the government might not be in favor of it, keeping the fact in mind that a large number of government employees will lose their job security and the Government, a big portion of its vote bank in the process. According to N S Viswanathan, the former Reserve Bank deputy governor, the first need is to divest the governance of lenders from the government. A holding company structure is very essential to carry on this change. Since the government enjoys so much power under the nationalization laws, governance is difficult and if we can clip the wings of the government in this regard, half the job is done.

The government should make it clear if these are commercial enterprises or government departments as lack of proper definition lead to governance issues. Viswanathan acknowledged the NPA norms that were drafted by the Central bank on February 12, 2018, and June 7, 2019, as steps in the right direction as they instilled discipline in the State-run Banks and the Industry. Under the norms, RBI had also proposed to consider a Loan as an NPA after a day of non-payment of its dues from the designated day. But the Industry termed it as too harsh and the RBI had to increase it to 30 days, the same was 90 days priorly. It was still a big improvement from the past.

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