The bloated levels of stressed assets in India’s state-owned banks have been a big cause for concern for quite some time now. With the Reserve Bank of India keeping up the pressure on them to identify, recognise and make provision for bad loans, a better picture can be had of the magnitude of the stress in the >banking system . The RBI is convinced that banks should clean up their books so that legacy issues are dealt with once and for all to enable them to move forward with a clean slate. This has, predictably, caused a scare across different layers of the economy. Given this somewhat grim background, there were legitimate expectations that the Centre, being a majority owner of public sector banks, would step in to provide increased fund assistance. In the end, Finance Minister Arun Jaitley has stuck to what he had promised earlier, and committed in his Budget speech capital infusion into these banks of just Rs.25,000 crore for the coming year. Mr. Jaitley’s offer is inadequate given the magnitude of the fund needs of these banks. Asserting that “we are solidly behind these banks’’, he did indicate that the government would find fresh funds should a requirement arise. Capital need is just a subset, or consequence, of the larger malaise of inefficiency that has been hurting these public sector banks for a long while now. Indeed, as Mr. Jaitley suggested in the >Budget speech , the strength of the financial sector is dependent on a strong and well-functioning banking system. Viewed in this context, the decision to set up a Banks Board Bureau, headed by former Comptroller and Auditor General Vinod Rai, is a significant move forward. The board could yet be an effective mechanism to end political interference in business procedures and decision-making in banks. An empowered independent bureau such as this could help reset the concept of an arm’s-length relationship in public sector banking. Once ownership is delinked from management, fixing accountability becomes that much easier. This can foster a decision-making framework that privileges business sense. It is, however, important to ensure that systems are in place to make the autonomous functioning of this bureau sustainable.
Mr. Jaitley has done well to take a holistic approach to the bad >loans problem . Letting the sponsor of an asset reconstruction company to hold up to 100 per cent stake in it should spur foreign entities to look at the Indian “bad asset” market as an opportunity. A bankruptcy code is long overdue, and it would help banks pursue recovery action purposefully. A tough regulator and a stingy government appear to have combined forces tacitly to lay the groundwork for possible M&A (mergers and acquisitions) activity in the Indian banking space. It is commendable that there is a concerted effort to clean up the ecosystem to ensure fair play in the banking field.