At the start of the year, the Narendra Modi government organised a “Gyan Sangam” in Pune, involving bank chiefs, regulators, experts and officials, to analyse what has gone wrong with India’s state-owned banks, and the correctives needed. Since then, the government has announced a few steps, including one aimed at professionalising bank boards, a new bankruptcy law and an assurance from the PM that there will not be any political interference in the lending decisions of banks. These were all welcomed by bankers, investors and the regulator, and the battered stock prices of banks rose after that. With the changes since then being incremental, however, and worries over the huge pile of bad loans yet to ease, especially given the lack of investment and consumption demand, the need for more capital to provision against potential losses has again been highlighted.
The regulator too has voiced its concern, with RBI governor Raghuram Rajan saying that the central bank is advising further capitalisation to enable banks to fully recognise the problem of bad loans and make provisions accordingly.
No government can ignore structural problems in the financial sector, especially when state-owned banks still dominate banking. These banks are critical not just for financing industry when the economy rebounds, but also for delivering on social security schemes. It’s time now for an overhaul before the next set of licences is given out to payment and small banks a few months on.
