Public sector banks need greater autonomy so that they can quickly react to frauds, effectively manage any internal and external shock and improve their governance structures, according to a study conducted by the Reserve Bank of India (RBI). The success of the consolidation of PSBs hinges on how larger banks improve their governance structures, it said.
“Altogether, we foresee that the persistent regulatory efforts by the policymakers towards cleaning banks’ balance sheets, restructuring, recapitalisation, and recent consolidation through mega mergers would help boost overall soundness of the banking system,” the report said. The study was conducted by the development research group (DRG), a part of the economic and policy research department of the RBI.
Large-scale bank frauds, cases of money laundering and unusual exposure to credit risk have raised concerns over inadequacies of the governance structure and its impact on the industry. The banking sector registered 6,801 frauds to the tune of Rs 71,543 crore in FY19, 53% of which were related to credit lending.
Additionally, the banks’ asset quality started worsening from 2013-14 onwards, with the gross and net nonperforming assets (NPA) ratios rising from 2.3% and 1.1%, respectively, in 2007-08 to 9.1% and 3.7% in 2018-19. The soundness of public sector banks remains a challenge as asset quality issues were more pronounced for them.
According to the study, private banks did well in adhering to governance norms as compared to PSBs as the latter faced dual regulation, board complexities, slackness on internal controls and externally-imposed constraints through central vigilance agencies.