Arising tide of bad loans threatens the ability of banks to continue their business as usual. The problem is particularly severe with public sector banks. Results for the December quarter show their financial position in poor light. Each one of them has been reporting a higher level of non-performing assets and making larger provision against possible loan losses. Not only is their profitability affected but also the increased provisioning ties up their capital. The financial position of United Bank of India, a Kolkata-based public sector bank (PSB), is said to be so acute that the Reserve Bank of India had to step in and impose severe restrictions on its lending. While some reckless lending in the recent past has landed this bank in trouble, the economic slowdown has stressed the balance sheets of almost every PSB, even those with a stronger tradition of lending and better track record in managing their books. If the slowdown persists, the bad debts will increase and the chances of recovery will diminish. The RBI is naturally concerned. Having flagged the issue of NPAs long before it became a general concern of banks and their stakeholders, the banking regulator has, however, given a clean chit to banks including PSBs from the stability angle.

Two sets of related problems confront policy makers. First, the question of recapitalising PSBs to make up for their impaired capital has become a major issue, especially at a time when all banks have been asked to move towards global norms of capital adequacy. For the government-owned banks, now listed on the Indian stock exchanges, there are special challenges. To preserve their public sector character, they have been asked not to dilute the government shareholding to below 50 per cent of their paid-up capital. So for all practical purposes they have to turn to their majority owner, the government, for additional capital. However, while recognising the banks’ predicament, the Finance Minister has made a niggardly allocation of Rs.11,200 crore in the interim budget for bank recapitalisation, below last year’s Rs.14,000 crore and well below the current requirements of PSBs. Even in the few cases where the capital market could be accessed, investor response has been lukewarm, as the best-run PSB, State Bank of India, found recently with its qualified institutional placement. Second, the disadvantages of government ownership extend to recovery. Public sector bankers have less flexibility in dealing with problem loans. Finally, who can deny political interference in sanctioning loans as well as in their recovery?

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