PSBs and the NPA issue

30 AUG,2021 | MEDC


 

The government should not push public sector banks (PSBs) to lend even to keep the economic recovery going. When PSBs are directed to lend by the government, their objective shifts from fulfilling a socioeconomic responsibility to meeting official targets. This affects their overall asset quality and balance sheet, often leading to the rise of non-performing assets (NPAs) in the financial system. A higher level of NPAs then requires capital infusion by the government, often resulting in innovative financial engineering to make the banks’ balance sheets look healthy. There are better ways to prop up the financial system, especially when an economic revival seems to be increasingly likely. PSBs are not an extension of the Finance Ministry. They should be given more autonomy to manage their own affairs. Any attempt at forced lending risks destabilizing the entire financial system.

*Photo Credit: Google

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