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