There is an instructive piece of statistics in the latest Economic Survey: calculating the non-performing assets of India?s banks, the Survey points out that the gross NPAs, which had gone down by Rs 611 crore in 2006-07, rose in 2007-08 (the latest year for which data is available) by Rs 5,949 crore. This means in 2006-07, banks were more effective in recovering and writing off bad loans than the amount of such loans added; but this picture considerably worsened in 2007-08. Since the periods in question are pre-global financial crisis, one can expect that on NPAs, the performance of Indian banking will be worse in 2008-09. Since public sector banks own over 75% of the assets of the banking sector in India, it is fair to presume that any substantial change in non-performing assets will depend on how they perform. This is worth underlining. As the finance minister said in his Budget speech, public sector banks in India will continue to be government owned?the model that the Congress insists saved India from the financial stress that hit countries with private sector-dominated banking. If 2008-09?s figures show the banking sector has run up more non-performing assets than it liquidated in 2007-08, the implication is obvious. Public sector banks should not then point to similar rises in other economies to claim exoneration. Rather, it will be correct to argue that public sector banks, despite the support they enjoy, have not run a tight ship. In fact, the trends from 2007-08 show this is most likely to be the case.
It is this problem that is at the heart of the banking sector in India. Being run by the government is not the problem, the attendant attitude that such ownership generates within the management is the problem. Of course, it is also not fair to say that each bank has similar issues. But those that consistently display inefficiencies should be culled, mostly by merging them with better-run ones. That should be the watchword of the new government in this term as anything more substantial has been politically clearly ruled out for the foreseeable future. The increase in efficiency will generate returns for the public and, obviously, for the government, too. Among other things it will spare the government from looking around for funds to recapitalise weak public sector banks. The World Bank is funding such recapitalisation. It is odd for the government to table thump the virtues of public sector banking and then go looking for help for them.
