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Growth Imperatives: WILL BANKS REVIVE ECONOMY?, By Dhurjati Mukherjee, 26 August 2020 Print E-mail

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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