Ways To Fix Banking Crisis

Health of banking sector and national economy are directly proportional; cases of loan default and fraud doesn’t augur well for investment and other business activities in India


The banking industry in India, especially in the public sector, is in a mess, to put it mildly. The Non Performing Assets (NPAs) of banks have been rising quarter after quarter for the last four years and have now touched a figure of about Rs 9 lakh crores. According to the latest financial stability report of the RBI of December 2017, the gross non-performing advances (GNPA) of all scheduled commercial banks increased in percentage terms (once again) from 9.6 to 10.2 between March and September 2017. The banking stability indicator showed that the overall risks to the banking sector remained at an elevated level weighed down by further asset quality deterioration. Public sector banks have continued to record negative profitability since March 2016. In other words, for the last two years, the public sector banks have been running at a loss.

Strangely, the RBI gave a certificate of stability in this report to India’s a financial system. It also asserted that according to the result of the latest systemic risk survey conducted by RBI in October 2017, the risks were of a medium category. Only a month after this certificate was issued by the RBI, all hell broke loose in January this year when the Nirav Modi/Mehul Choksi scam broke out in the Punjab National Bank. More banking scams are coming to light with monotonous regularity. It appears as if the entire system has been allowed to rot and the stench has now become unbearable.

The present government’s case is that all the advances which have now become NPAs were given during the tenure of the UPA government and hence it is the UPA, which means the Congress party, which means Rahul Gandhi, who is responsible for the mess and the scams. This argument would have worked if the present government had not been in power for the last four years. The UPA and especially the Congress party have already been punished severely by the electorate in the 2014 Lok Sabha election. The Congress party’s own tally came down from 205 to 44 in Lok Sabha. That was punishment enough for their failure while in government. In 2019 or whenever the next Lok Sabha elections are held, it will be the performance of the NDA, especially the BJP, which will be under scrutiny. When we go to the electorate for their votes, we cannot tell them that they should punish the Congress party once again for what they did between 2004 and 2014. We will be called upon to justify our own record of governance before them.

The banking sector did attract the government’s attention during its early months in office. The chairmen of the public sector banks, along with officials of the ministry of finance and the Finance Minister, assembled for a three-day conclave and had many brainstorming sessions on the various problems afflicting the sector. A plan of action was also drawn up. The Prime Minister himself attended the conclave and shared his words of wisdom with the assembled gathering.

The government also took some other steps including the enactment of the bankruptcy law. But all these steps have produced little or no results and the banking sector continues to bleed. The latest is that the government has ordained that all NPAs above 50 crores should be examined in order to find out whether they also represent a scam. In the meanwhile, the morale of the bank employees is low. There is no doubt that all this will severely affect banking operations in the country, especially advances by banks for genuine economic activity.

The banking sector is the lifeline of the economy which will grow only if banks lend money to promoters for making fresh investments for genuine projects, especially in the private sector. Productive activities in the economy will shrink if banks are reluctant to do so. On the other hand, if promoters who take such loans become victims of circumstances, or cheat, then the health of the banking sector will be adversely affected. So, it is two-way traffic; a healthy banking sector is possible only in a healthy economy — and the sector will become its first victim if the health of the economy deteriorates. This is exactly what has happened in India. Despite our tall claims to the contrary, the Indian economy has been in poor health for some years, which in turn has affected the health of the banking industry.

In January 2016, more than two years ago, in an article written in a Hindi daily by former Finance Minister of India Yashwant Sinha, drawn the attention of the government to the deteriorating health of the banking sector and made some suggestions. Some of these were:

1] We should stop pretending that everything is fine. Ever-greening of loans should be stopped forthwith. An honest assessment should be made of the entire situation to understand the full extent of the problem.

2] Defaulters should be divided into three categories. In the first category we should place those defaulters who have been compelled to default for none of their fault. This will include promoters whose projects are stalled because they did not get clearances from the government like forest and environment clearances or land was not acquired in time or infrastructure facilities like rail, road or electricity connection were not provided to them. These defaulters should be rendered all help so that their projects get going and the NPAs are liquidated. In the second category we should place such defaulters who managed to secure bank loans undeservedly. Either their projects were not appraised properly or they did not have the necessary entrepreneurial or management ability or skill to bring the project to fruition. The solution in such cases is to separate the project from its promoter and, through a transparent process, hand over the project to another promoter for completion or operation. The third category consists of willful defaulters. Such defaulters are criminals and should face the full force of law. They deserve no consideration whatsoever. According to official estimates, more than 1 lakh crore is involved in such defaulting. My own guess is that the amount is much larger than the figure mentioned above. It is also important that such defaulters are not allowed to flee the country.

3] The asset reconstruction companies should be further straightened so that banks can transfer to them the more difficult NPAs and concentrate on their core business.

4] An independent body of experts should be appointment to study the appraisal system of the banks so that projects are properly assessed before loans are advanced to the promoters.

The former Finance Minister had also said in that article that the ultimate remedy for distress in the banking sector is improvement in the overall economy. NPAs, by and large, are products of either a failing economy or of willful default. In a booming economy, there will be little or no NPAs. This is where our claim of being the fastest-growing large economy of the world becomes suspect.