Public lenders aim to control bad debts than credit growth

The Economic Survey Volume II 2016-17, tabled in Parliament, said: “The problem is that public sector banks are in damage limitation mode rather than seeking out new clients and opportunities. So, how can they regain their true function of providing credit to support economic growth? What actions will be necessary to ensure that problems will not recur?”

“Inadequate demand cannot be the full explanation for the credit slowdown because the growth in lending by private sector banks is robust and much greater than for the PSBs,” it said. 

The Survey, authored by Chief Economic Advisor Arvind Subramanian, noted that burdened by stressed assets and atmosphere of uncertainty that existed for some considerable time, banks, especially those in the public sector, have focussed on their Non-performing asset (NPA) problem than on new lending. 

Highlighting India’s Twin Balance Sheet (TBS) challenge, the earlier Economic Surveys have emphasised that tackling this challenge will require four R’s - Recognition, Resolution (which targets corporate balance sheets), Recapitalisation (which targets bank balance sheets) and Reform.

The government and the RBI have taken important actions to address the Twin Balance Sheet challenge. It is to be hoped that they will work expeditiously. But even as they play out, thinking about a strategy - of complementing resolution with reform and recapitalisation - to create a banking sector that can help revive credit, investment and growth must be an ongoing priority. 

“Even as the new measures aimed at resolution unfold, it is worth thinking about the other ‘R’s in the context of a strategic approach to the banking sector,” the Survey said. 

The most important element, surely, is the fourth R - Reform. Three elements will be key to any reform package. First, rescues can be selective. The prompt corrective action (PCA) framework can be invoked to ensure the worst performing banks are winnowed out of future lending and shrunk in size over time. Rescues could then be extended solely to the group of viable and near-viable banks.