ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Engineering Banking Sector Recovery and Growth

The idea of “bail-in” in cases of serious banking instability has been widely discussed in India ever since the introduction of the Financial Resolution and Deposit Insurance Bill. Given the large non-performing loans of public sector banks, the Government of India and the Reserve Bank of India as the regulatory authority have to quickly act to ensure that public confidence in the soundness of commercial banks is not breached. In this context, three approaches are explored that could be adopted either individually or in a variety of combinations in different proportions essentially to secure banking stability. The bail-in idea should not be considered except in extreme conditions of large financial stress. The idea could be tried even before the extreme situation arises with provision of incentives.

‘Riskless Capitalism’ in India

A study of the financial processes underlying India’s high-growth trajectory of the 2000s and its relationship with “riskless capitalism,” a term first used by Raghuram Rajan in November 2014, finds that the Indian growth story cannot be over-simplistically explained as a result of “market-oriented” reforms. Public sector bank credit-financed investments, particularly in the infrastructure sector, played a significant role in sustaining growth, most crucially after the global economic crisis. Such a growth trajectory, however, proved to be unsustainable with the expansionary phase coming to an end in 2011–12 and bad loans piling up in the banking system.

Public Sector Bank Mergers

The slowdown in the economy and the resultant rise in bad loans have led to criticism of public sector banks and questioning of their raison d’être. While there is a rush to find a quick solution by merging PSBs, it would be wise to examine the ground realities closely. India needs a mix of efficiently run PSBs and aggressive private banks to achieve growth and development along with social justice.

A Critique of RBI’s Trend and Progress of Banking in India

Over the last three years, the scope of the Reserve Bank of India’s Report on Trend and Progress of Banking in India has drastically come down. Information on important aspects of the operations of commercial banks and other financial institutions is now not presented in the report. A plea is made to restore the contents of the erstwhile reports and enhance the utility of the publication with additional data fromRBI’s existing database.

Were Public Sector Banks Victimised through AQR?

An inadvertent consequence of asset quality review by the Reserve Bank of India is that it portrayed public sector banks as inefficient managers of the burgeoning non-performing asset crisis relative to their private sector peers. A study, which used panel data regression to investigate the NPAs of 46 scheduled commercial banks between 2007 and 2016, has explored the myth by adopting a strategic orientation perspective to look into the antecedent periods of high uncertainties and jolts, leading to the build-up of NPAs, the changes in banks’ strategic orientations, and their effects on provisioning and NPA reduction. But no evidence was found to support the myth and to suggest that banks, across ownership, are incrementally exposing their NPAs ex post, subject to provisioning ex ante and that a moderate approach during periods of high uncertainty is most effective in managing NPAs. The study questions the received wisdom regarding the nature of risk-free sovereign debts and their impact on the NPA problem.

Public Sector Banks Are Adrift

With credit and deposit growth slowing in key sectors and only retail credit growing, low capital adequacy ratios of banks, senior management changes in the offi ng, and bank mergers, the National Democratic Alliance government needs to ask itself what it envisages for public sector banks, and indeed for the Indian economy.

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