Questioning the existence of PSBs in light of the current banking sector crisis

Manuj Joshi 15th February 2018

NPAs and stressed assets have developed into a momentous problem which has put the banking sector in a fix.Public Sector Banks (PSBs) are facing difficultyin recuperating from thissituation,with many having entered the prompt corrective action list and others showing quarterly losses in financial reports. The government has also been putting in efforts to help the banks deal with the issue. RBI too has become vigilant to the situation and has been changing regulations accordingly.

It becomes necessary to understand how this crisis came to be to avoid such missteps in future.Accumulation of NPAs in the banking sector was a staggered process and started in 2003. The period between 2003 to 2007 saw policy changes which allowed private sector to participate in infrastructure development. There was a huge credit demand from aviation, telecom and other infrastructure sectors. Infrastructure companies could not expect resources from the shallow bond market so banks became their source of credit. Banks’ lending grew at a rate of 25% during this period. But they didn’t have the skills to gauge the viability of these projects because lending to infrastructure companies was the job of Development Finance Institutions (DFI). This exposed banks to risks they hadn’t dealt with in the past, like the delays in projects due to environmental approvals and policy issues. Lending to infrastructure companies was wrong on another count. Banks generally have access to short term deposits while these projects were of long term maturity. This difference between maturities of assets and liabilities created a mismatch in balance sheets.

The aftermath of the global financial crisis in 2008 saw a counterproductive strategy than what would have been beneficial. In its efforts to support the economy, government encouraged PSU banks to lend more to in...

Note: Views expressed in this blog are those of the author.