Events & Issues
New Delhi, 24 August
2020
Growth
Imperatives
WILL BANKS
REVIVE ECONOMY?
By
Dhurjati Mukherjee
The health of the
banking sector may be difficult to comprehend. Faced with a severe recession,
months before the onset of the corona pandemic, this fiscal may not be all too
encouraging. However, the banking sector needs to be given top priority, which fortunately
the government is doing, as it realises the sagging economy does need a boost.
The Reserve Bank of
India unveiled a loan restructuring programme as a first step towards nudging
industry and banks to return to normalcy while keeping interest rates
unchanged. The recent meeting of the Monetary Policy Committee (MPC) decided to
maintain status quo on rates but acknowledged the need for action to aid
economic growth. However, surplus liquidity in the banking system is still
pushing down borrowing costs for companies and can be a sufficient tool for the
time being to help borrowers.
Recently, the RBI
formed a five-member committee with former ICICI Bank chief, K.V.Kamath, as its
Chairman to suggest the process for putting in place a framework for banks to
restructure loans that turned bad due to Covid-related issues. The panel has
been tasked with recommending the financial parameters to be included in the
resolution plans, with sector-wise benchmark ranges for such parameters. The
other members include Diwaker Gupta, Vice-President of Asian Development Bank
and Canara Bank chairman, T. N Manoharan, who will join after their current
assignments while the others are Ashvin Parekh, Managing partner of Ashvin
Parekh Advisory Services and Sunil Mehta, CEO of Indian Banks’ Association, who
will also be Member Secretary.
One may mention here
that the 15th Finance Commission Chief, N. K. Singh, underlined the need for a
significant government outlay for recapitalisation of public sector banks over
the next five years in addition to higher defence spending along with certainty
in their flow while accelerating reforms to combat the impact of Covid-19. At
an AIMA event, Singh suggested a reform plan for state-run lenders, arguing
that the sector continued to be ‘over protected’, something that was not done
when the economy was liberalised in 1991. The Finance Commission is in
discussion with various ministries in the run-up to finalising the report,
which is due in a few months.
While the banking
sector has been hitherto shielded from the effect of the pandemic, the outcome
is expected to be felt over the coming quarters when the impact of loan
defaults is felt. Currently, the RBI imposed moratorium and suspension of the
Insolvency & Bankruptcy Code provisions have held back banks from setting
aside funds for loan losses, which are expected to touch a two decade high.
Though the ideal debt-t-GDP ratio should be 60 per cent, it may well reach 80
per cent of GDP given the need to spend more.
Though experts
believe that the current year may witness a surge of non-performing assets
(NPAs) of banks, due to the widespread pandemic, investment in the economy has
to be given a boost. The public sector banks have to play a major role in
boosting up investments, obviously with help and support from the government.
Only then will private investment, both Indian and foreign, follow on expected
lines.
It is estimated that
public sector banks need to raise around Rs 2 lakh crore in external capital
over the next two years to tackle the funds shortage that has been exacerbated,
according to rating agency Moody’s. Most of the capital required by these banks
is likely to come from the government though a few have raised some money from
the market. A large number of private sector banks have already undertaken
capital raising in an effort to meet their financial requirements. There are
indications that the government may further advance money to some of the weak
hanks. All this as also the merger of several banks, a section of experts
believe may improve the overall financial strength of banks at the end of the
fiscal.
It is encouraging to
note that the National Infrastructure Pipeline (NIP) plans to spend Rs 110 lakh
crore on nearly 700 projects across sectors such as transport, communication,
urban development, energy and water. However, it needs to be stated that a
major part of these funds should find its way to the rural sector and job
creation, thereby helping the revival of the economy.
The government’s
recent launch ‘Atmanirbhar Bharat’ is
another area where banks have a major role to play by making available adequate
funds for widespread growth of entrepreneurship and even expansion and support
of existing units. Though the government has been urging banks to lend in a big
way for expansion of business, there are scattered reports that some of the
PSUs are lending conservatively, fearing rise in NPAs.
At such a juncture
when the government has focused on self-reliance, funds are vital to make this
programme a success. In view of the recent skirmishes with China, the
government has decided to rightly bring down imports and identified a host of
products that are to be made indigenously. For this, financial support would be
necessary and banks and financial institutions would have a vital role to play
in this regard.
Experts believe that
if lending is carried out judiciously by following a laid-down process, the
possibility of NPAs increasing may be minimal. It needs to be pointed out that
if loans are advanced after proper checks and balances without any political
interference, there is hardly any possibility of rise in NPAs. Obviously,
before sanction of a loan, the relevant track records of the debtor are
scrupulously examined.
It has been revealed
that NPAs have gone up mainly due to unpaid borrowings of large enterprises,
which mostly have political back-ups. There were demands that names of big
business groups be brought into the public domain, but the government has yet
to take action in the matter.
One cannot deny that
PSU banks have played an important role in reaching grass-root levels and
reached the common man in the villages. Lakhs of people have received subsidies
or payments in their bank accounts in rural areas. The Jan Dhan programme has
been remarkable as it increased financial literacy facilitated and helped in
opening of bank accounts of the common man, who now visit banks instead of
depending on unscrupulous moneylenders. This augurs well for the economy which
should pick up in the second half of the financial year. Needless to point out
that banking is vital for development of enhanced economic activities and
employment generation, specially in rural areas. ---INFA
(Copyright, India
News & Feature Alliance)
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