Role of PSBs in economic growth vital: Governor Rajan

While India’s banking landscape is poised to change with the introduction of new types of entities like ‘small finance banks’ and ‘payment banks’, the role of public sector banks (PSBs) will continue to remain substantial in terms of supporting the needs of sustainable and equitable economic growth, according to RBI Governor Raghuram Rajan.

In this context, the continued stress on asset quality of PSBs and the consequent pressure on capital adequacy is a matter of increasing concern, Rajan said in his foreword to the Financial Stability Report (FSR).

“Hence, actions on the part of the government, as also the Reserve Bank, in helping them overcome legacy issues, strengthening their governance structures and processes, and improving their performance, are important,” he said.

As on March-end 2015, PSBs accounted for the largest share of aggregate deposits at 72.9 per cent and gross bank credit at 71.6 per cent in the country.

The FSR noted that while the regulatory move towards encouraging greater market access and market discipline will help the development of domestic financial markets, the banking sector, especially the PSBs, will be expected to shoulder major responsibility to accelerate growth in the economy.

The policy initiatives for improving the governance and management processes at PSBs, along with a re-orientation of business strategy, will help improve the performance of PSBs in the long run, even as they presently look to clean their balance sheets in the wake of regulatory impetus, the report said.

The regulatory initiatives, according to the central bank, will need to be sensitive to the prevailing emphasis on asset quality (mainly of PSBs), and concerns related to banks’ ability to raise long-term funding in the current stage of development of the debt market.

Furthermore, concerns relating to potential asset-liability mismatch, and other practical aspects involved in the provisions enabling flexible financing by banks for long-term project loans to infrastructure and other core sectors, with ‘resetting’ of loan terms, need to be adequately addressed.