Public sector banking is in the throes of a major crisis. Many leading banks are saddled with mammoth bad debts, which have adversely affected their profitability and resulted in erosion of share values. The banks are now trying to initiate legal action against defaulters, most of them large corporate and business entities. The CBI director has criticised bank managements for not taking timely action, especially in the case of Vijay Mallya, promoter of Kingfisher Airlines. So, why did the banks fail to initiate timely action? The corporate governance and decision-making mechanism in PSBs have not been up to the desired level. If excessive and often undue government interference affects decision-making, inadequate oversight and supervision by the Board of Directors weakens the system of checks and balances. Consequently, the banks take bad lending decisions and then are unable to act swiftly to cut losses and recover dues.
The government has initiated steps to tackle the issues connected with burgeoning bad debt. At the bank level, appointment of professional boards, insulating management from political influence by granting more powers and autonomy are right steps. At the policy level, the government should address the larger question of PSBs financing long-gestation projects in infrastructure, power and steel sectors. In the past, financing was done by specialised financial institutions which could deal with the associated risks. It would be difficult to juggle savings mobilised through retail banking and channel them to finance long-gestation projects, especially when there is a slowdown or downturn or long-gestation projects get stalled for reasons beyond the control of both borrower and lender.
The government should also not lose sight of the need for a bankruptcy law to prevent recurrence of these problems. Otherwise, the vicious cycle of bad lending decisions, mounting bad debts and its writing off and recapitalisation will continue to drain tax-payers’ money. The government should have a just legal system equipped to swiftly hand out verdicts in high-profile cases that would send a strong message that PSBs cannot be taken for a ride.