Public Sector Banks: A Resurgent Force

Major Achievement:

1. Strengthening PSB Resilience: The Gross NPA ratio of Public Sector Banks (PSBs) has improved significantly, declining from 14.58% in March 2018 to 3.12% in September 2024, reflecting the success of targeted interventions.
2. Expanding Financial Inclusion: PSBs and SCBs are boosting financial inclusion by opening 54 crore Jan Dhan accounts and sanctioning over 52 crore collateral-free loans under schemes like PM Mudra, Stand-Up India, PM-SVANidhi, and PM Vishwakarma.
3. Expansion of Bank Branches: The number of bank branches increased from 1,17,990 in March 2014 to 1,60,501 in September 2024. 1,00,686 of these branches are located in Rural and Semi-Urban (RUSU) areas.
4. Kisan Credit Card (KCC) Scheme: Total operative KCC accounts as of September 2024 stood at 7.71 crore, with an outstanding amount of ₹9.88 lakh crore. This scheme provides short-term crop loans to farmers.
5. Support to MSME Sector: The Government of India has supported the MSME sector through affordable credit initiatives. MSME advances grew at a CAGR of 15% over the last 3 years, with total advances reaching ₹28.04 lakh crore by March 31, 2024, reflecting a 17.2% annual growth.
6. Growth in Gross Advances of Scheduled Commercial Banks:  The gross advances of Scheduled Commercial Banks (SCBs) grew from ₹8.5 lakh crore to ₹61 lakh crore between 2004 and 2014 and have further surged to ₹175 lakh crore by March 2024.

3. R-4:
Recognition: Identifying the true financial health of banks, especially by acknowledging non-performing assets (NPAs) and bad loans, to ensure transparency.
Resolution: Addressing problematic assets through restructuring, selling off bad loans, or other mechanisms to stabilize banks and reduce toxic debt.
Recapitalisation: Infusing fresh capital into banks, ensuring they are financially strong, able to withstand shocks, and operate above global norms, supporting continued lending and economic growth.
Reforms: Implementing governance, regulatory, and operational changes to align banks with global best practices, enhancing efficiency and sustainability.

4.  Insolvency and Bankruptcy Code (IBC): The Insolvency and Bankruptcy Code (IBC), enacted in 2016, consolidates and amends India’s laws on insolvency and bankruptcy. Its primary goal is to streamline and expedite the resolution of insolvency claims, making the process more efficient.
5. FSIB set up: The Financial Services Institutions Bureau (FSIB) was set up by the Government of India on July 1, 2022, to recommend candidates for senior roles in government-owned financial institutions. Its main function is to identify and select the right talent for these positions.

Still issues Presist:

1. High NPA (Non-Performing Assets) Ratio: As of March 2023, PSBs in India had an NPA ratio of 6.5%, which is significantly higher than the private sector banks’ NPA ratio of around 2.6%. The high NPA ratio continues to burden PSBs, limiting their ability to lend and increasing financial strain.
2. Delay in Resolution: The resolution of bad loans often takes years. For instance, the average time taken to resolve insolvency cases under the Insolvency and Bankruptcy Code (IBC) is approximately 400-500 days, which is significantly higher than global standards.
3. Twin Balance Sheet Problem: The twin balance sheet problem refers to the stress faced by both corporate borrowers and banks. As of FY 2021-22, India’s corporate sector had nearly $460 billion in outstanding debt, much of which was classified as stressed or bad loans. This issue has led to a slowdown in credit growth and economic recovery.
4. Manpower Shortage: PSBs have faced a consistent manpower shortage. As of 2022, the vacancy rate in PSBs was reported to be around 20%, with over 2 lakh positions unfilled. This shortage affects operational efficiency and the ability to scale up banking services.
5. Lack of Advanced Technology: Many PSBs still lag behind private sector banks in adopting digital banking technologies. In a 2021 report, it was found that PSBs accounted for just 14% of total digital banking transactions, while private banks accounted for over 60%. This technological gap hampers their competitiveness in the digital age.
6. Corruption by Officials: High-profile cases like the 2018 Punjab National Bank (PNB) scam, where a $2 billion fraud was committed by a few officials in collusion with private firms, highlighted corruption issues. This case caused a major loss to the bank and dented the credibility of PSBs.
7. Interference by Political Executives: Political interference in the functioning of PSBs has been a longstanding issue. In the case of the PNB scam, there were allegations of political influence on the management of the bank, which may have contributed to weak oversight and eventual fraud. This has led to a lack of accountability and inefficiency within PSBs.

Way forward:

1. Strengthen Regulatory Frameworks: Adapt and enhance regulations to address emerging risks in the financial sector.
2. Focus on Digital Transformation: Leverage technology to improve customer outreach, operational efficiency, and service delivery.
3. Support for MSME and Agriculture Sectors: Increase funding and resources to promote growth and financial accessibility for MSMEs and the agricultural sector.
4. Continue R-4 Reforms: Persist with reforms under the Recognition, Resolution, Recapitalisation, and Reforms (R-4) strategy to maintain financial stability and improve banking practices.
5. Improve Insolvency Resolution Process: Enhance the efficiency of the insolvency and bankruptcy process for quicker resolution and recovery of bad debts.

Conclusion

Public Sector Banks in India have made remarkable strides in recent years, achieving unprecedented financial milestones and contributing significantly to the nation’s economic stability and growth. The decline in Gross Non-Performing Assets (GNPA) and improved Capital to Risk (Weighted) Assets Ratio (CRAR) reflect the sector’s resilience and sound risk management practices. The EASE framework has been crucial in institutionalising reforms, promoting prudent lending, and leveraging technology for better banking services. The focus on financial inclusion has expanded access to banking, empowering millions with affordable credit and insurance. With a stronger financial base and improved asset quality, PSBs are well-positioned to support India’s development agenda and drive inclusive economic growth.

Prelims Question: