Economic Highlights
New
Delhi, 21 May 2018
Rescuing PSBs
TAP PARALLEL BANKING
By Shivaji Sarkar
The
strength of the Indian economy has been a reliable banking system and the
parallel economy. The 11 Public Sector banks (PSB) are suffering from a loss of
Rs 31,688 crore and need another Rs 1 lakh crore capitalizations. This is in
addition to Rs 90,000 crore already recapitalized.
The
parallel economy – not black – is facing a crisis affecting the rural, MSME and
retail markets across the country. Many southern Chief Ministers have expressed
their concern in their discussion with the 15th Finance Commission.
Both the Central government and Finance Ministry are equally concerned. The RBI
has put 11 banks in the ‘prompt corrective action’ category. It means moratorium
on dividend and be prepared to put more capital. The Parliamentary Committee on
Finance is set to call RBI governor in June to understand the issues of NPA that
has now touched 10 per cent of the banking capital.
The
banks for decades have been supporting government programmes such as Food for
all, road constructions and other infrastructure schemes. Even the private
sector benefited but it also amassed huge unpaid debts leading to the present
crisis. The Economic Survey 2016-17 has mentioned that 50 large corporate houses
have been responsible for the huge NPAs. This is apart from the problems the
private banks such as the ICICI are facing.
Finance
Minister Piyush Goel has assured the banking sector that the Centre would act
to reactivate and rescue the PSBs. Since the 2007-8 sub-prime crisis, that did
not hit India, the UPA government started incentivising industry. The industry
took large loans, which they did not require and for whatever reasons defaulted
on repayments. The bankers said that weak laws did not enable them to recover
the money. Since then banking and bankruptcy laws have been strengthened. But
12 years of problems are not to be solved with that ease. Recovering loans are an
expensive proposition.
The
SEBI meanwhile has warned the Punjab National Bank for delayed reporting of the
$ 2 billion fraudulent transactions allegedly carried out by Nirav Modi and
Gitanjali group of companies. There are many private banks which have slipped
into a crisis situation. The myth that private banks were better has been
busted.
Banking
is supposed to be a growth facilitator. But if the savings remain at a low
level, as it has been witnessed during the past few years, the repayment of
loans are not there and banks suffer from internal weaknesses, as was evident
from the Nirav Modi or Vijay Mallya incidents, the economic trajectory cannot
remain healthy.
Another
aspect that the banks have ignored is the medium, small and micro enterprises
(MSME). These are the lifeblood of the Indian economy. Its share of the GDP is
around 30.7 per cent. The MSME constitutes only 16 per cent of total bank
credit as smaller enterprises lack access to formal credit. They depend,
according to Free Press Money Control study, on self financing -- 78 per cent
and 22 per cent is accessed from local financier, institutions, and government
help (7 per cent).
The
MSMEs face credit shortfall of Rs 2,000 crore. The large banks are still not
properly geared up to meet their needs during odd hours. They take loans at
higher interest rate and try to repay the same day. This happens with small
retailers, vendors and farmers. The money is easily accessed and returned
quickly. The risk factor is minimal.
Micro
finance is not considered a lucrative area by the large bankers because of its
unstructured nature and the feeling of it being cumbersome. This has caused
problems for MSMEs. The banks have lost an opportunity, which could have helped
them having a dependable clientele. The MSME is stated to be the most
capital-efficient segment in the economy.
It
also unravels the fact that Indian bankers are least innovative. For the future
of banking, the banks would have to include greater participation of the MSME.
They would also have to change their timings to suit the unorganised sector.
The rules of the game have to be modified. The universal banking has become a
myth enmeshed in too many formalities and least functioning.
The
bankers over the years have not looked for new avenues. The PSBs constitute
around 55 per cent of credit; private sector banks 19 per cent, NBFCs
(non-banking finance companies) 17 per cent; cooperatives 7 per cent; and
regional rural banks 2 per cent. This is an indication that credit growth is
moving away from public and private banks.
The
PSBs as the recent discussions in the Finance Ministry indicate cannot depend
on recapitalisation with Government -- taxpayers’ --money. The low-income
groups, despite Jandhan accounts, remain outside the purview of formal banking.
They pay the highest credit costs. They need to be included into the formal
lending structure.
The
RBI also understands that small finance banks, with a different view and focus,
should have different regulatory compliance. The purpose is to allow the small
finance banks to focus on the unbanked customers and MSME segment so as to
facilitate financial inclusion. To add to this, the small finance banks have
their own problem. They borrow from large banks to lend to their clientele. It
makes their operation expensive and so they charge higher interest rates.
An
idea floated by former RBI Governor Raghuram Rajan, is to create a competitive
loan market as it is believed competitions benefit the customer. This could
lower their interest costs and with better monetary health they would be help
the nation grow faster.
The
major issue is how the large banks would be a player in this segment, which has
different pattern. The RBI basically says that small finance banks would ensure
acceptance of customers which were not hitherto considered creditworthy. This
is a suggestion to the large bankers.
If
they enter this area, they would have a vast market. Before doing so they would
have to adapt to small market practices and be quick to give loans and accept
repayments on a daily basis. This is not the forte of the PSBs or private banks.
It is often left to chit-fund-type NBFCs, whose credibility is at the lowest.
The
banks have enormous opportunities around. They would have to come out of the
cocoon, move as foot soldiers into the market with loose targets. The modified
functioning can open up large fields and if it functions properly, the
recapitalisation should not be a problem.---INFA
(Copyright, India News & Feature Alliance)
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