<p>For many public sector banks (PSBs), 2016 was a nightmare as the Reserve Bank of India (RBI) conducted an asset quality review (AQR) in a bid to clean up balance sheets of banks. However, this resulted in mounting losses for the banking sector.<br /><br /></p>.<p>Not only the banks’ shares have fallen sharply in recent months, but they have posted the largest quarterly losses. No doubt, public sector lenders are carrying far more bad debt than private banks.<br /><br />Former RBI Governor Raghuram Rajan in his speech at Mumbai, said, “Our intent is to have clean and fully provisioned bank balance sheets by March 2017, after the RBI started its asset quality review last year.”<br /><br />“Some bank results, mainly public sector banks, have not been, to put it mildly, pretty. Clearly, an important factor has been the asset quality review (AQR) conducted by the Reserve Bank and its aftermath,” Rajan said.<br /><br />Inappropriate time<br />Charan Singh, a full-time visiting faculty and former RBI Chair Professor at IIM-Bangalore, said, “In the first place, I think asset quality review, the way it was specifically done in India and its timing was inappropriate and not necessary. India, as also the rest of the world is passing through a period of extensive uncertainty. In such situations, it is prudent and safe not to cause disturbances and shock to confidence levels of public.”<br /><br />“PSBs have been fulfilling a social objective since nationalisation and have been in forefront in extending banking in rural areas, promoting financial inclusion, and participating in Pradhan Mantri Jan Dhan Yojana. Also, during the recent financial crisis, unlike private sector banks, public sector banks have been extending substantial amount of credit for infrastructure projects. Hence, isolating PSBs and shaming them by AQR was unwarranted,” Singh said.<br /><br />“And most importantly, many PSBs, despite meeting social obligations are as or more efficient than private sector banks but painting all PSBs with a single brush is not fair. Finally, with great difficulty, banking habits are being inculcated in a cash-preferred society, and with PSBs spearheading that movement, policymakers should be cautious in public pronouncements on performance of PSBs. Otherwise, with confidence eroding in the banking system, once again, people will start placing their savings in other assets and not banking products,” Singh added.<br /><br />“In addition, India is passing through a severe surgical operation whereby 86% of its blood supply is under dialysis, and select denomination of currency in circulation is changing. Demonetisation and its effect on the MSME sector may be temporary and short-lived. However, as the RBI has acknowledged in its report of December 7, as well as December 21, RBI’s assessment is clouded by the still-unfolding effects of the withdrawal of specified bank notes,” Singh added.<br /></p>
<p>For many public sector banks (PSBs), 2016 was a nightmare as the Reserve Bank of India (RBI) conducted an asset quality review (AQR) in a bid to clean up balance sheets of banks. However, this resulted in mounting losses for the banking sector.<br /><br /></p>.<p>Not only the banks’ shares have fallen sharply in recent months, but they have posted the largest quarterly losses. No doubt, public sector lenders are carrying far more bad debt than private banks.<br /><br />Former RBI Governor Raghuram Rajan in his speech at Mumbai, said, “Our intent is to have clean and fully provisioned bank balance sheets by March 2017, after the RBI started its asset quality review last year.”<br /><br />“Some bank results, mainly public sector banks, have not been, to put it mildly, pretty. Clearly, an important factor has been the asset quality review (AQR) conducted by the Reserve Bank and its aftermath,” Rajan said.<br /><br />Inappropriate time<br />Charan Singh, a full-time visiting faculty and former RBI Chair Professor at IIM-Bangalore, said, “In the first place, I think asset quality review, the way it was specifically done in India and its timing was inappropriate and not necessary. India, as also the rest of the world is passing through a period of extensive uncertainty. In such situations, it is prudent and safe not to cause disturbances and shock to confidence levels of public.”<br /><br />“PSBs have been fulfilling a social objective since nationalisation and have been in forefront in extending banking in rural areas, promoting financial inclusion, and participating in Pradhan Mantri Jan Dhan Yojana. Also, during the recent financial crisis, unlike private sector banks, public sector banks have been extending substantial amount of credit for infrastructure projects. Hence, isolating PSBs and shaming them by AQR was unwarranted,” Singh said.<br /><br />“And most importantly, many PSBs, despite meeting social obligations are as or more efficient than private sector banks but painting all PSBs with a single brush is not fair. Finally, with great difficulty, banking habits are being inculcated in a cash-preferred society, and with PSBs spearheading that movement, policymakers should be cautious in public pronouncements on performance of PSBs. Otherwise, with confidence eroding in the banking system, once again, people will start placing their savings in other assets and not banking products,” Singh added.<br /><br />“In addition, India is passing through a severe surgical operation whereby 86% of its blood supply is under dialysis, and select denomination of currency in circulation is changing. Demonetisation and its effect on the MSME sector may be temporary and short-lived. However, as the RBI has acknowledged in its report of December 7, as well as December 21, RBI’s assessment is clouded by the still-unfolding effects of the withdrawal of specified bank notes,” Singh added.<br /></p>
