A new wave of reforms set to sweep banking

At this juncture, allowing higher foreign stake in PSBs is the right call. It will help them increase capital and scale up business

- TAMAL BANDYOPADHYAY

When it rains, it pours. Typically, this means when one bad thing happens, multiple bad things follow in quick succession — making a difficult situation worse. In the context of the Indian banking space, it is the opposite: ‘Too many good things are happening. ‘The sector is embracing reforms on multiple fronts.

The industry has been constantly in the news in the past decade. First, there was a massive cleanup drive by the Reserve Bank of India (RBI) through a unique tool called asset quality review. The regulator unearthed the hidden pile of bad assets and ensured that banks set money aside to address them and make their balance sheets healthy. At least three banks had 25 per cent or more gross nonperforming assets (NPAs) in different quarters of the 2018-2019 financial year (FY19) and, after provisioning, four had between 10 per cent and 19 percent net NPAs. (All figures are rounded off.)

The banks were also forced to strengthen their credit appraisal and risk management capabilities. Yes, I am talking about public sector banks (PSBs), majority owned by the government.

Next, as many as 11 PSBs were put under the prompt corrective action (PCA) framework, which barred them from giving fresh loans until they acquired the acumen to identify both the right sector and borrowers to lend the public money they collect in the form of deposits.

The next stage was consolidation. In 2017, the State Bank of India (SBI) merged five of its associate banks, along with the Bharatiya Mahila Bank, with itself. A series of mergers among PSBs followed in 2019 and 2020. As a result, the number of PSBs is down from 27 to 12.

Barring a few, which have not been part of the consolidation drive, most PSBs have acquired scale; they are well capitalised and have been making record profits.