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4) PSBs are currently dealing with difficult issues with no easy solutions. But the current situation is also an opportunity to undertake reforms and strengthen state-run banks. Critically analyze the recommendations of standing committee on finance in this regard?(250 words)

TopicIndian economy – issues

4) PSBs are currently dealing with difficult issues with no easy solutions. But the current situation is also an opportunity to undertake reforms and strengthen state-run banks. Critically analyze the recommendations of standing committee on finance in this regard?(250 words)

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Why this question

NPA is a huge issue being faced by banks since long. Despite several steps having already been taken place to address this issue, results have not come. In this light, the recommendations by the standing committee tries to deal with the problem holistically and needs to be studies while preparing NPA related issues for GS3.

Key demand of the question

The question expects us to bring out the recommendations of the committee and do a critical analysis of the same. Finally, we need to provide a fair and balanced opinion and discuss way forward.

Directive word

Critically analyze – When asked to analyze, you  have to examine methodically the structure or nature of the topic by separating it into component parts and present them as a whole in a summary. When ‘critically’ is suffixed or prefixed to a directive, all you need to do is look at the good and bad of something and give a fair judgement.

Structure of the answer

Introduction – Highlight the issue of NPA being faced by the PSBs and bring out the seriousness of the issue.

Body

  • Discuss the recommendations of the standing committee on finance headed by Veerappa Moily in dealing with the NPA issue – committee has questioned the capital adequacy rules imposed by RBI, particularly for banks that do not have international exposure and are under the prompt corrective action framework, committee has suggested that RBI should consider separate treatment for NPAs arising due to wilful defaults and those because of external shocks, such as policy or judicial interventions, Third, to avoid large haircuts, the committee has recommended fixing a base price for bidding of assets under the bankruptcy process, committee has noted that banks lack the resource base and expertise to engage in long-term project financing, recommended constituting a high-powered committee to evaluate the powers and authority of RBI, among other things
  • Discuss the pros and cons of these recommendations in light of the impact they would have in resolving the problem of NPA for PSBs

Conclusion – Give a fair and balanced view on the effectiveness of the recommendations and discuss the way forward.