Public Sector Banks in India : Growth of NPAs and Restructuring Aspects

Abstract

The recent restructuring of Public Sector Banks (PSBs) has generated immense interest in the economic world and the various stakeholders which include investors, depositors, borrowers, the staff working in these banks and the top management of the merging entities. Whereas the depositors look for safety of their monies, the borrowers of merging entities look for new loan products at cheaper rates and faster delivery. The investors will look for resumption of dividend payouts at higher rates and capital appreciation of their investments and the staff looks for better working conditions. The top management will expect more freedom to operate and manage their respective banks more efficiently to grow and earn higher profits. The merger of strong banks was recommended by the first Narasimham Committee in 1991. It has taken almost 28 long years for the Government of India to act on this very critical suggestion of the committee. It is widely believed that this belated step has been initiated due to huge pile of Non Performing Assets (NPAs) with Public Sector Banks and the resultant need for their frequent recapitalization. It is a moral hazard and bad economics for any government to regularly recapitalise PSBs being the major stake holder and having total administrative control of their boards and the top management. To enable PSBs meet the regulatory capital as per international norms and the provisioning requirements enforced by Reserve Bank of India, use of tax payer’s money (collected for economic development of the country) is questionable. However it is made clear by the government that the merger is intended to make PSBs bigger and internationally competitive and to build up their capacity to access capital markets for raising resources. A perspective of growth of NPAs and the resultant impact on the financial  deterioration of PSBs over a time horizon can give answers to the need for restructuring of Public Sector Banks as repeat of such actions by the government may again be necessitated in future. The improvement in financial performance parameters of PSBs over next few years will answer if act of restructuring by the Government of India results  in  internationally strong ‘too big to fail banks’ .