Question 24 from UPSC CSE 2018 - Economy

Question

With reference to the governance of public sector banking in India, consider the following statements:
1. Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
2. To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.
Which of the statements given above is/are correct?

IASCODEX · Accepted Answer

Correct Option: B. 2 only

Strategy: - Evaluate statement 1: The phrase "'steadily increased'" is factually inaccurate regarding capital infusion, as it has fluctuated based on NPAs and reform cycles. Thus, statement 1 is incorrect.
- Evaluate statement 2: The SBI merger of associate banks has indeed taken place, aligning with public sector banking reforms towards consolidation and efficiency. Thus, statement 2 is correct.
- Conclusion: Only statement 2 is correct.

Key Info: Public Sector Banks (PSBs) in India are majority-owned by the Government and play a critical role in the economy.

- Capital infusion refers to the financial support provided by the Government to PSBs to help them meet regulatory capital requirements, especially in wake of high NPAs (Non-Performing Assets) and to maintain CRAR (Capital to Risk-Weighted Assets Ratio) mandated under Basel norms. However, capital infusion has not steadily increased every year in the last decade; it has fluctuated based on fiscal policy, government priorities, and the health of the banking sector. For example, after the Asset Quality Review (AQR) initiated by RBI in 2015, infusion peaked between 2015-2019 and tapered as PSBs performance stabilized and mergers took place.
- In 2017, the Government merged five associate banks (State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore) and Bharatiya Mahila Bank into the State Bank of India under the authority of Section 35 of the SBI Act, 1955. This was implemented to strengthen operational efficiency, achieve economies of scale, and create a global-sized bank. This consolidation move aimed to reduce duplication, enhance risk management, and streamline treasury operations for PSBs.
- Indian banking reform committees, including the Narasimham Committee, had also recommended consolidation in the public sector to make Indian banks globally competitive. The mergers have reduced the number of PSBs and aimed to create stronger, more resilient entities better able to handle NPAs and international competition.

IASCODEX · Answer

Option A: 1 only

IASCODEX · Answer

Option C: Both 1 and 2

IASCODEX · Answer

Option D: Neither 1 nor 2