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Letter to BS: Weak financial institutions need operational reforms

NPAs are under-capitalised and the banks are restrained by the prompt corrective action framework as they do not meet the stipulated regulatory financial parameters

Business Standard 

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This refers to “If can’t lend, they should be privatised” (June 29). It seems Niranjan Hiranandani’s (pictured) panacea for lack of public sector banks (PSBs) lending is the privatisation of The are not lending because their earlier reckless lending has turned into non-performing assets (NPAs). These NPAs are under-capitalised and the banks are restrained by the prompt corrective action framework as they do not meet the stipulated regulatory financial parameters. He says that “excessive funds lying with banks should be disbursed in the market”. Banks are in the business of financial intermediation that is, prudent lending, so as to give a decent return to their depositors and pay dividend to their owners. They are not soup kitchens set up during natural disasters. Similar problems arose in the NBFC sector because some large non-banking financial corporations (NBFCs) got into dire straits. There are issues for mutual funds on account of defaults.

Mr Hiranandani should realise that weak and beleaguered financial institutions can’t lend like healthy institutions. They need time to recuperate. They need comprehensive governance and operational reforms. Just by privatising the PSBs, the problems won’t go away. What kind of valuations would poorly capitalised institutions with high percentage of stressed assets and outdated systems get in the market? Aren’t some of the private banks facing governance and ownership problems? His argument of converting 4,000 into banks, I presume, was said in jest. Banks are institutions holding public deposits and should have the trust of the public. Privatisation and reckless lending are not the solutions.

The Reserve Bank of India has taken appropriate steps both through its monetary policy and its liquidity management mechanisms to do the needful.

Arun Pasricha, New Delhi


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First Published: Sun, June 30 2019. 21:07 IST
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