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Public Sector Banks (PSBs) have played a significant part in the country’s economic growth. The principles of nationalization also contributed to the social banking character of the PSBs. This scenario has been changing since implementation of the new economic policies in the 90s. Three decades down the line, the unabated policy changes have only cost the banks dearly.

Public Sector Banks have been saddled by non-performing assets (NPAs), that has become unmanageable, mainly in the past five years. Apart from this, there has been a generalized credit crunch in the financial system due to stresses in the non-bank financial sector, especially following the collapse of Infrastructure Leasing & Finance Services (IL&FS).

In general, PSBs constitute more than 65% of total banking business of all SCBs (Rs.136 lakhs cr deposits and Rs.104 lakhs cr advances as of March 2020) and the Private sector covers 30% of the business leaving the balance of 5% to foreign banks and Small Finance banks. However, during the past five years PSBs in an average, share a very large portion of 85% total gross NPAs leaving 13% share to private sector and 2% to other sectors. Compounded Annualized growth (CAGR) of gross NPAs in the past five years is around 28%. It is also observed during the past 5 years, NPAs increased by 25% on an average basis as detailed below:

If opening NPA’s are based at 100, slippages are added at 67%, recoveries with up gradation only at 20 percent and whereas write-off is 22% resulting the cumulative NPAs to increase at 25 percent (100+67-20-22=125). It may be observed from the analysis that the Govt. aims to keep the burden of certain sticky private banks on the PSBs entity and in a later stage easily converts the Public sector entity into Private entity (ex: IDBI,YES Bank etc). Further 100 percent provisions are made with the assurance and the strength of capital infusion, leaving easy way to the major defaulters to enjoy the benefit of write-off and haircuts.  Unhealthy prudential write-off is made which reduces the Advances folio as well as the Net NPAs.

The government had in the last 7 years come out with multiple ‘solutions’ for the NPA crisis. From bringing in the Insolvency Bankruptcy Code (IBC), attempting to bring in FRDI bill, putting banks through multiple Prompt Corrective Action (PCA), periodically changing provision requirement, Mergers of Banks and so on. This paper attempts to critically review the implementation of the mergers.

Read the full report here: Cost of Bank Mergers- The need for a CAG Audit

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