Sir,
Recently, a major economic move was unveiled, Government has decided to infuse 2.11 lakh crore capital over the next 2 year into Public Sector Banks. It will give a new life to the banking sector which is going through tough time having lowest growth in 60 years.
Reforms in the banking system were required from a long time as bad loans in the Indian banking system jumped 80% in fiscal year 16. Now-defunct-liquor baron Vijay Mallya alone has to pay Rs 9000 cr to several banks. NPAs have more than doubled in 24 month. If NPAs along with restructured assets are added, the total would come close to Rs 10 trillion. Private investment remain elusive in the face of the ‘twin blance sheet’ problem (if overleveraged companies are unable to invest or borrow afresh and banks are unwilling or unable to finance fresh investments, a private investment-led recovery is unlikely) raising bad money level had forced bank to set aside more money to cover the risk of defaults eroding profitability particularly for the state-owned banks have made losses for 5 quarters in a row. Credit growth has fallen to 30 year low.
This step will give lots of confidence in the market. It will reduce the burden on banks. It will give a boost to the slowing economy.
But, it is still a long haul. Alone Recapitalisation will not be enough, bank credit needs to pick up, if not, cycle with NPAs will repeat again. For long term, poor performing Bank should be accountable and incentives should be given to good banks. In addition to this, fiscal deficit should also increase. Some experts are also argue that the real solution is to consolidate the bank by mergeing them or by and privatising them.
Yours etc…..
Vishu Adhana
IIMC Jammu
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