RBI, FinMin spar over NPA trouble in public sector banks

While RBI has blamed poor credit management practices at public sector banks for rise in bad loans, the finance ministry has defended them saying only they were willing to provide large loans

GN Bureau | May 1, 2014



The sharp rise in non-performing assets has not just meant trouble for banks, especially state-run ones, but has also deepened the cracks between the finance ministry and the Reserve Bank of India (RBI) which have got into a verbal battle over the matter.

According to a newspaper report, the ministry and the banking regulator have reportedly entered into a verbal duel after the latter blamed reckless lending by public sector banks (PSBs) to corporate houses for the ballooning of bad loans.

In a discussion paper titled ‘Management and Governance Issues in Public Sector Banks’, presented by the RBI to the government in March, the central bank has said that the economic downturn alone cannot be blamed for the sharp rise in bad loans. The RBI has alleged that the ‘sub-optimal credit management’ among state-run banks has also been a major cause of the problem.

Gross non-performing assets (GNPAs), which are bad loans before making any provisions, in PSBs have arisen to an alarming level of 12.1 percent in 2013 up from 6.8 percent in 2009. In comparison, the NPA figures in new private banks have fallen from 6.6 percent to 5.3 percent for the same period.

Unhappy with the sharp criticism coming their way, the ministry is learnt to have defended PSBs replied saying that most private banks had stopped lending post the 2008 economic crisis. It has said that PSBs became the only providers of big-ticket loans to manufacturing and infrastructure companies, as directed by the government, to help revive the economy.

Not convinced with the ministry’s justification, the RBI shot a reply last week reiterating its stand that PSBs were not careful enough about sanctioning loans. It has also mentioned that even if PSBs were lending with a view to reviving the economy, they should have followed the principles of prudent lending and should have undertaken adequate checks to assess the credit-worthiness of borrowers.

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