Events
& Issues
New Delhi, 23 January 2019
Banking Sector
PLANS MAY LEAD TO REVIVAL
By Dhurjati Mukherjee
It is heartening to
note that the Government is likely to push through some key decisions ahead of
the General elections. On the cards is a decision on transfer of surplus funds
by the Reserve Bank of India to the Government. This is likely to follow the
Bimal Jalan committee report, which is expected before March-end. The Government
has also given the go-ahead to the amalgamation of three public sector banks –
Bank of Baroda, Dena Bank and Vijaya Bank – thereby creating the third largest
bank in the country and ensuring a strong entity with economics of scale.
The other major
activity is LICs acquisition of IDBI Bank and this process is expected to be
concluded within a month or two. Meanwhile, State Bank of India’s mega
qualified institutional placement of equity shares is expected in the last
quarter of this fiscal as it aims to raise Rs 20,000 crore to help gear up
lending.
At the same time, the
apex bank in its bi-annual financial stability report estimated the ration of
gross non-performing assets (NPAs) to gross advance to come down to 10.3 per
cent in March 2019 from 10.8 per cent in September. As is well known, bad loans
have been the bane of the domestic sector, particularly affecting the PSU
lenders. The RBI blamed the deterioration in asset quality to the credit boom
of 2006-11, when lending grew by over 20 per cent.
The other factors
that contributed to the rise in NPAs were tax credit appraisal and post
sanction monitoring, project delays (sometimes unforeseen) and cost overruns.
The other point not mentioned in the report is obviously political interference
in grant of loans and corrupt practices due to an unholy nexus between a
section of political leaders and bankers.
It is over reassuring
to hear that with focus on recoveries and regulations such as the Insolvency
& Bankruptcy Code (IBC). The report found asset quality improving with the
bad loan ratio at 10.8 per cent in September last year from 11.5 in March 2018.
The present RBI Governor
Shaktikanta Das has said in the report that “the banking sector appears to be
on course to recovery as the load of impaired assets recedes”. Further, he
observed: “Notwithstanding the significant costs wrought by the enhanced
recognition of asset impairment in public sector banks, it appears to have led
to a greater discipline in credit assessment, higher sensitivity to market risk
and better appreciation of operational risks.”
Thus, as NPA
formation has slowed down and recoveries from recent NPAs are streaming in, the
future of credit repayment culture appears bright. As the RBI banking progress report
pointed out: “Minimising the time taken to resolve cases and the development of
a conducive environment that discourages unnecessary delays assume
importance”. Notwithstanding the
cleaning of balance sheets across ownership, the struggle for public sector
banks would continue as these will feel the pinch owing to absence of capital
as per requirement, according to a banking expert.
Another positive
development has been that Finance Ministry’s directive to banks to check all
loans above Rs 50 crore which have been classified as bad asset from the angle
of possible frauds. The RBI decided to build a public credit depository
registry to capture data of all big loans as well as of wilful defaulters and
match the data with SEBI, the Insolvency and Bankruptcy Board and other
agencies to check for fraud. The steps had been initiated keeping in mind the
increasing number of such cases as well as the sums involved. Loans accounts
worth Rs 69,755 crore were involved in banking frauds over the past three years
with the Rs 14,000 Norav Modi-Mehul Choksi earning the dubious reputation of
being the biggest and most brazen one.
To delve into
statistics, as per the RBI, Indian banks lost Rs 16,409 crore in 2015-16 in
frauds and Rs 16,652 crore in 2016-17 which doubled to Rs 36,694 crore in
2017-18 after the Norav Modi-Mehul Choksi case. The number of fraud cases has
been rising -- from 4693 cases in 2015-16 and 5917 cases in 2016-17. The number
of such cases reported by banks was generally hovering at around 4500 in the
last 10 years before their sudden spurt in 2017-18, stated bankers. Sanjay
Battacharyya, former SBI Managing Director, said: “After the horse bolted once,
bankers should have exercised for greater caution. During 2017-18, PSU banks
accounted for 93 per cent of frauds of more than 1 crore.”
The vital question
that needs to be understood is that of autonomy of banks and financial
institutions as this is crucial to the development of a strong banking sector.
It cannot be denied that there is lack of professionalism in this sector as
also interference by political leaders at all levels. To strengthen banks, they
should be allowed to follow their own regulations to determine the amount and
quantity of loans.
The Government is
helping the public sector banks to reduce NPAs but at the same time if they are
judicious in scrutinising loan applications and following a professional code,
then one can expect a turnaround of most banks. Also as three banks are being
merged, the Government could also think of another such merger in the coming
fiscal.
However, this is not
to say that genuine financial needs of industry, specially the micro and small
sectors, should not be considered. As is well known, industry can prosper and
with it the economy through better disbursement of loans to genuine entrepreneurs.
Statistics reveal that MSMEs are more prompt in returning loans more than the
big industry houses.
Moreover, the
formation of an expert committee, headed by U. K. Sinha, former Chairman of the
Securities & Exchange Board of India, to identify issues and propose
long-term solutions for economic and financial sustainability of small
businesses is no doubt a positive development, both for banks and the MSME
sector.
As is generally
agreed, the future lies in consolidation of banks as this would obviously
ensure economics of scale and help in gearing up profitability. Whether it is
giving loans to industry or agriculture, PSU banks should endeavour to ensure
profitability through their lending operations. Experts are of the opinion that
of banks are given sufficient autonomy, there should be no reason why
reasonable profits cannot be achieved.
It is expected that
in the coming years capital scarcity and bad loans may be steadily eased and
this may lead to strengthening banks and this has been reiterated by RBI its
latest financial stability report. There should be no reason why PSBs can’t
match the profitability of private banks with more professionalism and better
governance.---INFA
(Copyright, India
News & Feature Alliance)
|