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Economic Survey: Banking Reforms Must Follow Resolution And Recapitalisation

The government presented the economic survey for 2017-18 on Monday



A customer counts Indian one-hundred rupee banknotes
A customer counts Indian one-hundred rupee banknotes

While the admission of large stressed assets under the Insolvency and Bankruptcy Code and the recapitalisation package for public sector banks will help address India’s twin balance sheet problem, more will need to be done in the new financial year, said Arvind Subramanian, chief economic adviser, in his Economic Survey for 2017-18.

The IBC, according to the survey, has provided a resolution mechanism for the bad loan problem. The government’s recapitalisation package for public sector banks, which account for most of the banking system’s troubled assets, has taken care of the recapitalisation aspect of the banking system’s turnaround.

Now, the government would need to focus on the fourth ‘R’ of the twin balancesheet problem, which is reforms, the chief economic adviser said.

“The TBS actions, noteworthy for cracking the long-standing “exit” problem, need complementary reforms to shrink unviable banks and allow greater private sector participation,” the survey noted.

The gross NPA ratio of scheduled commercial banks (SCBs) increased from 9.6 per cent to 10.2 per cent between March 2017 and September 2017, whereas, their restructured standard advances (RSA) ratio declined from 2.5 per cent to 2.0 per cent, the survey noted. The stressed advances (SA) ratio rose marginally from 12.1 per cent to 12.2 per cent during the same period. The gross NPA ratio of public sector banks increased from 12.5 per cent to 13.5 per cent between March and September 2017. Stressed advances ratio of public sector banks rose from 15.6 per cent to 16.2 per cent during the period.

The rise in bad loans and provisioning requirements forced the government to announce a Rs 2.11 lakh crore recapitalisation plan for state-owned banks. Eleven public sector banks under the prompt corrective action framework of the Reserve Bank of India are set to receive Rs 52,311 crore in form of recapitalisation. The other state-owned lenders will receive Rs 35,828 crore. Banks put under the PCA framework are those that have high bad loans and weak capital adequacy levels.