The Indian banks are struggling hard and there is a need for implementing reforms in the banking sector. Privatizing the Public Sector Banks (PSB) can help because when the ownership is privatized, it will change the structure of incentives, accountability and also improves the supervision and regulation.
Even though the Indian banking Industry remains stable in this severe economic downturn, there is still a need for introducing reforms in the banking sector. A report published by the Brickwork ratings said, the downward risk that is arising from the Vulnerability of the Scheduled Commercial Banks especially Public Sector Banks is worrisome and these issues need to be addressed immediately. Even before Pandemic the balance sheet of the banks was already stressed and top of it the pandemic crisis worsened the situation. The moratorium offered is expected to deepen the hole.
In the latest Financial Stability report published by RBI, predicted an increase in the Non-Performing Assets (NPAs) from 8.5% in March 2020 to 12.5% under a baseline scenario and up to 14.7% under a severe stress scenario in March 2021. The situation of Public Sector banks is pessimistic as there may be a shoot in the Gross Non- Performing Assets from 11.3% in March 2020 to 15.2% under a baseline scenario and up to 16.3% under severe stress scenario in March 2021. There is a severe risk in the bank’s capital. It is estimated that there will be a decline in the Capital Adequacy Ratio (CAR) of the banks.
There is a proposal from RBI to privatize the PSBs, which is to cut the Government stake in six PSB to 51% over the next 18 months. There is a plan to introduce reforms that could initiate steps to improve the structure of governance, control, and regulation of these banks which is essential for increasing the revenue. Privatization also changes the structure of incentives and accountability and also there will be more effective control and supervision.
The Public sector banks have been struggling a lot due to major changes made by the government demonetization and merger. These banks do not have adequate incentives to manage and overcome these risks. Meanwhile, both domestic, as well as the global economy, is affected by various risk factors. The duration, spread, and intensity of the pandemic is unknown. Major risks are arising from GDP Contraction, high fiscal imbalances due to low revenue and high health expenditure are also a major threat, according to the report.
