To school India’s state-run banks, the Modi government will give them report cards

The tall task of cleaning up.
The tall task of cleaning up.
Image: Reuters/Ajay Verma
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The Narendra Modi government is going to try out a new strategy to get India’s state-run banks back in shape: name and shame.

“We are ranking all the banks on the reforms, and at the end of every year we will make that ranking public. So, it will be a report card to the citizen on the health of each bank,” Rajiv Kumar, financial services secretary, said in Mumbai on May 23.

India’s public sector banks (PSBs) have been hurting for some time now, saddled with gross non performing assets (NPAs) worth Rs8.41 lakh crore as of December 2017. But it was the $2 billion (over Rs13,000 crore) fraud reported by Punjab National Bank in February that sent shivers down the spines of lenders and the government.

On Feb. 27, just days after the fraud was exposed, Kumar unveiled a reform road map. The Modi government gave a 15-day deadline to PSBs to identify gaps and weaknesses, and gear up for rising operational and technical risks. Now, the government intends to keep track of the measures taken by these lenders.

But while the intent is right, this name and shame approach is unlikely to yield results. “Investors and customers know which are the weak banks but we haven’t seen that the banks have made any efforts to change because of a bad reputation, or that they have lost customers because of it,” Anil Gupta, vice-president for the financial sector at rating agency ICRA, told Quartz.

In 2015, the government had provided guidelines to evaluate banks in order to grant them more capital. According to these, more funds would be granted if they met certain parameters like keeping their bad loans under check, improving financial inclusion, and diversifying their business.

Then, in October 2017, the government decided to pump in Rs1.35 lakh crore into ailing PSBs over the next two years, with weaker banks bagging most of this money. “It is a good idea to make the lenders accountable but it is difficult to implement because banks know that the owners will step in to rescue them in dire situations,” added Gupta. “If they are performing badly and are not able to meet the parameters, then they won’t be able to raise money from the markets as well, so the government has no option but to rescue them.”