New problems beleaguer banking industry

The Indian banking industry has been suffering from an extensive Non-Performing Assets (NPA) crisis. The Public Sector Banks (PSBs) are hard hit but privatebanks are also not completely immune from it. It is claimed that the PSBs and private banks are not on the same plane.

The PSBs are expected to perform many functions that are related to the development of the country. The privatebanks, on the other hand, are more profit-oriented.

PSBs have been ahead of private banks in cases of financial inclusion, implementation of Jan Dhan Yojna, priority sector loans, and in many other cases.

Beginning of NPA

Infrastructure development is considered as a nation building programme. But in this area, the role of private banks has been restrictive. It is known that the biggest contributory factor of NPA has been related to the infrastructure loans of banks.

In the first phase of the Manmohan Singh government, the Indian Ministry of Finance miscalculated the growth projection of GDP. It was thought that India will be able to experience double digit growth of GDP for many years and proper infrastructure was needed to achieve this. So, the government pressurised banks to make loans on infrastructure. Generally, banks lend on an operating basis and theseloans are not long term loans.

A large number of high cost infrastructure projects got stalled during the late years of the Manmohan Singh government, which included road and power projects. The unavailability of required land due to various factors like environmental clearances or suitable compensation to evicted people was some of the responsible factors. Land acquisition has been a persistent problem of the Indian economy. Under the Indian Constitution, states were granted the powers to enact (and implement) land reforms in 1949. However, this autonomy also created significant variation across states in terms of the number and types of land reforms that have been enacted and the policy had to be changed later. A large number of power projects stalled as they failed to obtain Power Purchasing Agreement (PPA) in time or failed to get coal block linkages. In many cases, state DISCOMS (power distribution companies) were unable to purchase power from the producers due to their lack of funds.Steps takenThe Reserve Bank of India (RBI) made it the norm todeclare all stressed assets of banks when Raghuram Rajan was the RBI governor. A large number of banks were brought under the Prompt Corrective Action (PCA) measure. On the basis of some financial criteria, if banks slip below certain norms on three parameters, the RBI could impose PCA on that bank. The three parameters included capital ratio, asset quality, and profitability. Imposition of PCA virtually means imposing restriction on credits to unrated borrowers. As many as 11 banks came under PCA. Later, some of them were able to come out of PCA.

The Government of India in 2017 responded with two important measures namely the Insolvency and Bankruptcy Code (IBC) and amendments to Banking Regulation Act in order to deal with NPA issue. But large number cases of bankrupt firms have been coming to National Company Law Tribunal (NCLT). In most of these cases, timely resolutions are not happening. Therefore, out of court settlements have been suggested and many cases have been solved out of court. But a section of bankers are hesitant to solve matters out of court in the fear of being investigated later. Therefore the recovery of loans is being delayed. The ultimate sufferer is the economy and the people of the country.

Are the PSBs short of quality man-power?

The PSBs are mostly affected by poor assets quality. It is claimed that the PSBs have been facing dearth of quality human resources. Some observers are enthusiastic enough to consider lack of quality human resources as the principal source of financial stress of the banking industry. But if one examines the situation, it is not very clear if the ongoing crisis is the result of weak human resources. Actually, the most of the reasons behind this crisis was exogenous where bankers had little to do. The pressure from the government for

making loans to long term projects, government’s miscalculation of long term growth rate prospects of GDP, unnecessary political intervention in making loans, delayed or absence of governmental clearances for the infrastructure and most importantly lack of availability of land for road and other projects are some of the contributory factors.

Bankers do not agree that lack of quality human resources in the PSBs is a major cause of NPAs. Ashoke Pradhan, MD and CEO, United Bank of India told that the NPAs of PSBs is due, mainly, to exogenous factors. A high ranking SBIpersonality who did not want to be named, told that experts on banking can always be brought in. But the present problem of banking industry has nothing to do with lack of man-power.

A few private sector banks are doing well because theirmethod of business is not quite similar to PSBs. They look mostly at their profits.

Scope of free operation of the banks’ boards to be increased

It is said that excessive government or political control in appointments of members of boards in the PSBs are a major hurdle for free and fair operation of the banks. Even a

CEO of these banks cannot be employed without the permission of the government. Raghuram Rajan, economist and former RBI governor has categorically pointed out this aspect in his article in the recently published book titled‘What the Economy Needs Now’.

Are the banks over-pressurised?

The Indian investors are highly dependent on banks. The main reason behind this is the absence of a well-developed bond market. The spread and depth of the bond market is low in India. The lack of having a full-fledged secondary bond market is also a barrier. There are the NBFCs. But experts opine that they were not strictly monitored and that may be one of the factors behind the recent crisis of the NBFCs. Therefore the economy needs to have a well-developed bond market and equipped NBFCs to finance the investors’ needs. Actually, the economy needs to reduce the risk taking areas of banks and that is to be spread out to markets and other financial institutions. This aspect has also been pointed out by Rajan in his article in the book mentioned above.

The Annual Budget 2019 proposals and the PSBs

The PSBs have been suffering from a severe financial stress. The government as the biggest owner infused capital to PSBs in different phases for maintaining their regulatory capital. A section of PSBs was in need of capital for its growth of business from the government. In the Budget proposal of 2019, there has been a provision for `70,000 crore to PSBs. It is expected that bankscan use it for increasing their business. Actually, there has been an estimate of ` 50,000 crore as banks’ required growth capital. But over andabove the estimated figure, a higher budgetary provision of ` 20,000 crore is worth mentioning. But the time of receiving the funds is very important. In some earlier cases, it was foundthat banks received money but that was nottimely and banks could not utilise it properly and hence their lending process suffered.

Conclusion

It was expected that the banking industry will revive within a few quarters. There are signs of recovery. But a new problem has emerged in the form of the NBFC crisis. The mitigation of the banking crisis is interlinked with the extent of the NBFC crisis. In the last fiscal year, PSBs have been successful in recovering one lakh crore rupees. It is expected that more will be recovered provided the National Company Law Tribunal cases and out of court settlements of NPAs are speedily resolved.