‘PSB bad loans may cross 18% in extreme scenario’

FORMER DEPUTY GOVERNOR H R KHAN ASSESSES DAMAGE BY SECOND COVID WAVE

Given the second COVID-19 wave all over the country, non-performing assets (NPAs) or bad loans of public sector banks (PSBs) could cross 18 per cent if there is deterioration in economic activity due to the pandemic, former RBI deputy governor H R Khan said on Tuesday.

As per the Financial Stability Report released by the Reserve Bank of India (RBI), the NPAs of the banking sector were projected to surge to 13.5 per cent of advances by September 2021, from 7.5 per cent in September 2020, under the baseline scenario.

The report had warned that if the macroeconomic environment worsens into a severe stress scenario, the NPA ratio may escalate to 14.8 per cent.

With regard to public sector banks, Khan said the latest Financial Stability Report indicates that NPAs can go up to 16 per cent in severe case scenario but extreme case scenario has not been portrayed this time.

"Given the second wave all over the country, I think the extreme case scenario is something which one has to factor in. So, 18-20 per cent NPL (nonperforming loan) is not ruled out for public sector banks.

"So, systemic risk is something which the government does not want to take upon its shoulder," he said at a virtual conference organised by PHD Chamber.

So, this kind of regular systemic risks could also be a trigger for the decision for privatisation of public sector banks taken by the government recently apart from resources crunch, he said.

Observing that bank failure would take place irrespective of privatisation, he said world over, governments have bailed out the financial sector.

With regard to developmental intervention, Khan, a carrier central banker, said PSBs have played a huge role in the financial inclusion programme of the government including the Jan Dhan Yojana.

Now, with the digital foundation laid with Jan Dhan, Aadhaar and Mobile, he said there may not be need for so many public sector banks as brick-and-motar branches are not required everywhere.

Asked about suitable candidates for privatisation, Khan said that if one has to experiment then it could be a combination of a hopeless bank and reasonably good bank.

Further prodded, he said, Indian Overseas Bank and Bank of India could be possible candidates for privatisation.