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Get cracking on banking reform

The government must lay down a path to privatisation for at least some banks and take concrete steps to revive lending.

editorials Updated: May 18, 2016 18:42 IST

There is work ahead for the Reserve Bank of India (RBI) to reform public sector banks(AFP)

The proposal to merge subsidiaries of the State Bank of India into itself to create a behemoth that will help it reach higher in a global league comes like a breath of fresh air amid difficult news on India’s creaking banking system. The merger of five subsidiaries and the Bharatiya Mahila Bank, if successful, will create a giant with a Rs 37-lakh-crore balance sheet. A few days earlier, Parliament passed a new bankruptcy law that will make it easier for lenders to recover loans and enable the smooth takeover of insolvent companies. However, alongside these positive steps lie a welter of wounds that need to be healed if India’s banks are to put the economy on a sound footing. We already have a trade union planning a strike against the merger. It is time for the government to show some political will and stop a culture of entitlement among public sector bank employees.

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PSU bank results this month show that provisions made to cushion non-performing assets (NPAs) has left them bleeding. Eight PSU banks between them have shown quarterly losses in excess of Rs 14,500 crore over the past week. Syndicate Bank has also written off Rs 883 crore after a huge fraud in Jaipur. PSU banks accounted for Rs 360,000 crore of an NPA mountain of Rs 400,000 crore at the end of last December. While there may be ground to believe there are wilful defaulters who give borrowers a bad name, there are also cyclical factors as well as corruption and inefficiencies that plague banks. Consolidation only lowers costs. We need more. In contrast to PSU banks, young Bandhan Bank has turned a net profit of Rs 275 crore in its first seven months. What is it doing right that PSU banks are not?

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What we need is a thorough reform of PSU banks to alter their culture. The government must lay down a path to privatisation for at least some banks and take concrete steps to revive lending. Reserve Bank governor Raghuram Rajan has said bad loans have been contained and Banks Board Bureau chairman Vinod Rai is optimistic about banks recovering from stressed assets. But what we would like to see is a visible revival roadmap. The government is committed to infusing Rs 25,000 crore into PSU banks this fiscal year as part of a Rs 70,000-crore plan to clean up bank balance sheets over three years. Must we wait that long?