Finance Minister Nirmala Sitharaman has urged public sector banks (PSBs) to act swiftly in situations of fraud and willful defaults in an effort to combat bad loans and spur growth. According to sources, up till the financial year 2021–2022, banks have written off a startling Rs 11.17 lakh crore in bad loans over the previous six years. These non-performing assets (NPAs), including those for which full provisioning has been made after four years, are removed from the bank's balance sheet through write-offs.
During a recent meeting with PSB heads, the finance minister stressed the importance of robust risk management practices and the mitigation of cyber security risks. It was emphasized that banks should adhere to a strong internal audit framework and follow internal policies and caveats. Several challenges were discussed during the meeting, including the decline in market share in terms of advances and the need for low-cost deposit mobilization. The merger of HDFC Ltd with HDFC Bank was highlighted as a factor that will lead to increased competition for deposits, requiring PSBs to brace themselves.
The high-interest rate regime was identified as another area of concern, putting pressure on the net interest margin of PSBs. To address this, banks have been advised to focus on high-yield advances with proper risk management and to explore fee income opportunities. In an effort to further resolve stressed assets, the Reserve Bank of India recently issued a framework on compromise settlements and technical write-offs. This framework provides clarity on the definition of technical write-offs and offers guidance on the process to be followed by regulated entities. It also covers important process-related matters such as board oversight, delegation of power, reporting mechanisms, and a cooling-off period for normal cases of compromise settlements. However, it is important to note that penal measures for borrowers classified as fraud or wilful defaulters will still apply in cases where banks enter into compromise settlements with such borrowers.
The finance minister's call for swift action against fraud and wilful defaulters underscores the government's commitment to reducing bad loans and promoting a healthy banking ecosystem. By focusing on risk management practices, cyber security, and compliance, PSBs can strengthen their financial positions and contribute to the overall growth of the economy. The recent framework on compromise settlements and technical write-offs from the Reserve Bank of India will also play a significant role in resolving stressed assets and ensuring the integrity of the banking system.
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