Letter to BS: Govt should initiate reforms to improve working of PSBs

This is with reference to “Govt asks RBI to water down PCA framework”  (August 21). Over the last few days, the government has requested the Reserve Bank of India (RBI) to dilute the prompt corrective action (PCA) framework, bring common equity tier 1 (CET 1) and provide regulatory relief to power companies who have defaulted on bank loans. The RBI had initiated asset quality review (AQR) to bring an element of transparency in actual non-performing assets (NPAs) of banks. 

Prior to the AQR, most banks were merrily concealing a large part of their NPAs and the regulator tended to adopt a benevolent approach to the matter, even approving various schemes to delay recognition of impaired assets. The AQR provided transparency to the depositors in particular and the public at large about actual state of banks in India. The enforcement of PCA framework restricts banks, mostly public sector banks (PSBs) that have high NPAs and do not meet the minimal financial parameters to restrict their business activities till their financial strength is restored. Similarly, the RBI’s directions to the CET 1 above the Basel III norms was to provide a regulatory capital buffer knowing the incipient weaknesses of the PSBs and flaws in calculating their NPAs and assigning risk weights to their assets. Any attempt to dilute these norms will be tantamount to bringing back opacity in financial position of these banks, especially, PSBs and show entities, which are largely loss making, as strong enough to start lending. It will present a distorted picture of these banks and will put impediments in the process of their consolidation and restoring their financial health. This will be a disservice to the PSBs.

While the government did well to bring the Insolvency and Bankruptcy Code and enabling resolution processes, it has done precious little to substantively reform the governance and other systems in PSBs. In such a scenario to ask the RBI to dilute regulatory norms is fraught with risks. While the government is acting keeping in view their short term goals that is, thee 2019 general elections, the central bank must take a longer term view of things, that is, bringing transparency about financial health of public institutions and restoring their health. Yielding to the government’s attack will be a singular disservice to the PSBs and show that the central bank is complacent in discharging its important functions. The government even in this late hour should initiate the reforms to improve the working of PSBs, instead of asking for the change of rules of the game.

Arun Pasricha

New Delhi