FinMin to take fresh look at non-performing assets

Says rise in NPA is due to aggressive lending in a slowing economy

Under Arun Jaitley, the finance ministry is set to take a fresh look at the issue of governance in public sector banks (PSBs). Under the previous regime, the ministry had differed with the Reserve Bank of India (RBI)’s  view that lack of governance at these banks had led to a rise in bad loans.

In a detailed note to the ministry, the central bank had highlighted concerns related to governance in PSBs, adding these had led to a rise in non-performing assets (NPAs). RBI has also said government ownership led to hurdles in the operations of these banks.

In its reply to the central bank, the previous regime at the finance ministry said the rise in NPAs was primarily due to slowing economic activity.

According to the ministry’s communication to the central bank, PSBs were asked to boost lending at a time when private and foreign lenders had almost stopped lending to sectors such as infrastructure. Loans to sectors towards which there was heavy lending had turned bad. “The ministry said the credit targets for PSBs were revised to fill the gap created by private and foreign players,” central banking sources said.

RBI felt the government  should withdraw nominees from bank boards and the government shouldn’t appoint chief executives in banks.

The central bank’s observations to the ministry were also reflected in the report of the P J Nayak committee on governance in banks. The report had recommended a complete overhaul of the PSB structure and asked the government to cut its stake in PSBs to less than 51 per cent.

Though RBI’s letter to the ministry highlighted the importance of autonomy in PSBs, the autonomy was contingent upon the government reducing its stake. Apparently, the ministry hadn’t respondent to these observations of the central bank.

“Especially at a time when the government has to resort to borrowing for infusing capital and maintaining stake in PSBs, it is worth debating why the government of India’s stakes need to be at such elevated levels,” RBI’s letter to the ministry had said.

The Nayak committee suggested the government give up its control on state-run banks. All existing laws governing these lenders, such as the Nationalisation Act and the State Bank of India Act should be repealed and a bank should only be governed by the Companies Act; the government should transfer all its stake and powers to a separate entity, known as the bank investment company, the panel had said.

Sources indicate the ministry is studying the recommendations of the Nayak committee and is forming its opinion on these.

The Nayak panel also recommended the government cut its stake below in PSBs to 50 per cent so that there was restoration of a level playing field for these banks in matters of vigilance enforcement, employee compensation and the applicability of the Right to Information.

The panel had suggested a three-phased transition for PSBs, which would take two to three years.