Corporate entities’ excessive dependence on PSU banks- Financial stability implications



Shri Shaktikanta Das

Dear Shri Shaktikanta Das,

I had earlier written to you about excessive borrowings by certain corporate entities from the PSU banks and their over-leveraged operations ( In particular, I had suggested that RBI should be aware of the implications of corporates carrying out their operations, heavily dependent on PSU bank credit, instead of their own resources, and the implications of the same from the point of view of the stability of the financial system. I am not sure whether the RBI has had the time to apply its mind to this aspect in depth and initiate the necessary corrective steps.

I have since come across two news reports ( & that the PSU banks continue to extend loans to corporate entities on a largescale, perhaps on the basis of an appraisal of individual projects, without considering the heavily debt-drven, largescale expansion by the corporate entities into a wide range of sectors, in some of which they do not have the necessary experience.

While there are nominees of the Government and the RBI sitting on the boards of the PSU banks and are a party to the decision making process on such loans, there is a conflict of interest in their dual role, as a part of the PSU bank management and as a part of the Ministry of Finance, that often tends to dilute their role as the custodians of the stability of the financial system. As the regulator of the banks, the RBI needs to take cognizance of this and resolve the conflict so as to safeguard the interests of the financial system.

May I once again appeal to the RBI to accord due consideration to these concerns before events overtake regulation?.


Yours sincerely,

E A S Sarma

Former Secretary to Govt of India




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