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What is the problem with Public Sector Undertaking Banks in India?

June 18, 2018

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Public Sector Undertaking banks are a major component of the Indian Banking sector. The Government of India owns the majority stakes in all the 21 PSU Banks in the country. PSU banks own nearly 70% of the banking assets in the country. Banks have played an important role even though they have suffered losses in the recent years. In the last fiscal year, the banks registered a loss in excess of 62000 crores. The situation for PSU banks is deteriorating as the banks are unable to adapt to the transition in the global banking sector. These 21 banks have suffered heavy losses due to bad loans/ non-performing assets over a particular period. The recent banking scams have brought out the loopholes in the Indian banking system, and the bad corporate governance that are hollowing the PSU banks. The banks are struggling to keep pace with the changes and are fast losing their credibility amongst Indians.

The following issues are plaguing the PSU banks in the country:

Bad Loans or Non-performing assets

Loans granted by banks on which payment of interest or principal has defaulted even after a period of 90 days during the term of loan or at the time of maturity is considered as Non-Performing Assets. NPA are generally listed on the bank’s balance sheet, to keep a record of the defaulters. PSU banks are the worst performers in terms of bad loans compared to private sector banks. The Public Sector banks had NPA worth 8,57,000 crores till the end of 2017-18 Financial Year, with some of the biggest defaulters such as Nirav Modi, Vijay Malaya, Vikram Kothari, and several other defaulting in the repayment of debts. State Bank of India, the largest banking chain in the country, claims to significantly reduce the NPAs to 6% by 2022, IDBI had the highest NPA levels among the 21 PSU banks.

PSU Banking Scams

The recent Punjab National Bank was an eye opener for not only the citizens but also for the leaders of the country. Nirav Modi was the prime accused in the scam as his firms had duped the bank with worth more than 11000 crores of loans. The PNB-Nirav Modi scam brought out the fallacies and loopholes existing in the Indian banking system and especially in the public sector banks. This PNB scam is not the only banking scam reported in the last one and a half year, PSU banks such as Canara Bank, Andhra Bank, Bank of Maharashtra, State Bank of India have embroiled multi-crore scams that have jolted the faith of investors and account holders in PSU banks.

Bad Corporate Governance

The problem of corporate governance in Public Sector Banks (PSBs) is one of the major reasons behind the crippling condition of the banks. The recent scams showed the need for more transparency in the working of top-level executives in the Public Sector banks, while the poor quality of credit appraisal also affects the governing system of this banking institution. In the wake of the PNB-Nirav Modi scam, the government institutions have questioned the higher banking authorities, while some of the present CEOs and MDs feel that the watchful eyes of the government is making it impossible for them to work freely. The banking system right now needs credible top-level executives, who are able to take stringent and swift actions to bring the PSU banks on the right track.

Can India do away with Public Sector Banks?

Public sector banks have been the backbone of the India banking sector since the time of India’s Independence. Over the decades they have ventured into the remotest of villages and towns across the length and breadth of the country. But, lack of reforms and substantive measures to get in-line with the global banking system has crippled the growth of PSU banks. The global brokerage firm Goldman Sachs has grown skeptical of Indian public sector banks due to the recent losses and scams. However, the Government of India is trying to usher in much-needed reforms to bring in a change and stability in the functioning of banks. The government has formed a committee to look into setting up an Assets Reconstruction Company to take over the NPA from the PSU banks. On the other hand, the government has recently launched Mission Indrandhanush in 2015 to recapitalise the Public Sector banks, improving the credibility of banks, as banks will have a great lending power with them. Government is also mulling over the possibility of disinvestments, as it faces severe opposition over the move, as the PSU banks have carried the Indian economy even before the inception of the private baking system.. In 2017, the NDA government launched Version 2.0 of Indradhanush with minor tweaks from its predecessor. Public Sector banks are an important source for India’s goal of achieving financial inclusion, with the banking facilities available to every single citizen of the country close to their doorstep.

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What is the problem with Public Sector Undertaking Banks in India?
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Public sector banks have been the backbone of the India banking sector since the time of India's Independence. Over the decades they have ventured into the remotest of villages and towns across the length and breadth of the country.


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