India's Public-Sector Banking Crisis: Whither The Withering Banks?

The Indian banking sector is close to a breaking point. One generation after the sector was liberalised, assets and deposits remain dominated by government-owned banks, whose risk management and corporate governance frameworks have collectively proven unsustainably weak.

The situation is quite bad and there are no certain estimates on the extent of capitalisation required to bring the public sector banks back to the path of growth. It is our view that a comprehensive vision is critical for the sector – for the sustained economic growth it facilitates and for the populace to have access to quality financial services. The questions which need to be addressed are not easy to answer and will be best approached through a healthy public dialogue.

As the government thinks through its options, it will need to answer a number of questions about the structure of the banking industry – e.g. role of the government in running banks, ability of public sector banks to deliver credit & service for greater public good, government participation in banking giving a push to the financial inclusion. Our paper explores the extent to which the status quo could be maintained, should the government choose the path of minimal disruption.