'Improved Health' of PSBs: Reality or Mirage?

A recent statement from Union Finance Minister Nirmala Sitharaman at the Mint India Investment Summit, highlighted the increasing autonomy and financial independence of state-owned banks, praising the shift towards a ‘more professional approach’ in their operations. She noted that these lenders are now capable of raising funds from the market for developmental activities, reducing their reliance on annual capital injections from the government.

However, banking experts present a contrasting view, suggesting that the improved figures may not necessarily reflect the true health of these banks. They argue that the reported decrease in non-performing assets (NPAs) could be misleading, citing issues such as underwriting practices and loan renewal as factors contributing to this decline. 

Meanwhile the government asserts that the banking sector's health has improved, with public sector banks (PSBs) now yielding substantial dividends for the government. Finance Minister Nirmala Sitharaman emphasised that the NPA levels of these banks have witnessed a significant decline. According to RBI data, as of March 31, 2023, the gross non-performing assets (NPAs) as a percentage of gross loans stood at 5% for PSBs, down from 7.3% in FY22. Similarly, private sector banks recorded a decrease in NPAs from 3.8% to 2.3% during the same period. The overall gross NPA ratio for banks improved from 5.8% in FY22 to 3.9% in FY23, further dropping to 3.2% as of September 30. Between FY18 and FY22, the government injected a total of ₹2.86 trillion into PSBs, as disclosed by Bhagwat Karad, Minister of State for Ministry of Finance, during a parliamentary session in March 2023.

Thomas Franco, a banking expert, raises concerns about the lack of transparency in PSB boards and accuses them of being highly influenced by the ruling party, potentially obscuring the true extent of NPAs. He cites instances such as the State Bank of India's involvement in the electoral bond case as evidence of government interference in banking affairs. Franco suggests that the real truth about the banks' health may only emerge after the elections.

He also raises pertinent concerns regarding the impact of policy decisions on common people and small depositors in light of the purported improvements in the banking sector. “While PSBs have introduced new service charges like minimum balance charges, ATM charges, cash handling charges and inspection charges which directly affect the commoners, the benefits of loan write-offs primarily benefit corporate entities, leaving ordinary citizens to bear the cost”, he points out. Franco also highlights the disparity in interest rates citing examples. “The Tata group received loans at 4.5% percent interest per annum whereas for education loans or loans for self-help groups the small borrowers are burdened with higher interest rates of 11% or 12%”, he adds to emphasise that the current system favours corporate interests over common people. Furthermore, Franco expresses scepticism regarding the classification of MUDRA loans, noting that the government has directed banks not to classify them as NPAs despite their high default rates. 

"The banks can't keep hiding the NPAs for much longer. They'll have to reveal the true state of affairs after the elections. And then, they'll likely find themselves incurring losses once again. This will necessitate further capital infusion from the government and more write-offs. As we've seen over the last 30 years, this cycle repeats every 6 or 7 years. The current assertion of improvement is superficial and temporary, coming at the expense of small depositors, borrowers, and the common man in general" Franco explains.  

While the government celebrates the newfound self-reliance and improved performance of state-owned banks, concerns raised by banking experts regarding transparency and corporate favouritism underscore the need for continued vigilance and people-centric reforms in the sector.