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Banking Central | Why 2021 was an eventful year for Indian banks

A devastating second COVID wave and its aftermath dominated the banking industry in 2021. Cryptocurrencies and the crisis in cooperative banking also made headlines. Will 2022 be different?

December 27, 2021 / 03:53 PM IST

For the Indian banking industry, the year 2021 was eventful. Covid continued to be a dominant theme as banks, especially small and mid-sized ones, faced asset quality concerns and growth challenges as a devastating second wave battered the country.

This was also the year when banks shifted from risky corporate loans to safer retail loans. The year’s last Banking Central column is a good time to evaluate what the banking industry got right, what it didn’t and what comes next.

Cleaning the books

Banks also tried to cut exposure to unsecured loans. The second wave hit livelihoods as well as the ability of small-income borrowers to repay loans.

Banks significantly hiked provisions, or the money set aside against doubtful assets, and moved for resolution of large corporate bad loans by either awarding loan restructuring or going to insolvency courts. The strategy seems to be working.

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They managed to put the asset quality issues, a bugbear for the longest time, behind but as we head into 2022, the rise of the more transmissible Omicron variant poses fresh challenges.

The crypto suspense continues

The cryptocurrency boom and the central bank’s strong reservations about digital currency continued to make news.

Even as digital currencies gained popularity in India, the Reserve Bank was consistent in its reservations, which it shared with the government, citing “far-deeper” macroeconomic concerns even as the Centre got down to drawing up law for cryptocurrencies and other digital assets.

In June, the central bank said banks could no longer use its 2018 circular, which cautioned against trading in cryptocurrency and was but was struck down by Supreme Court in 2020, to warn customers.

The crypto industry read this as a positive development and went big on advertising the goods. The central bank, on the other hand, kept flagging its concerns.

The year 2022 could be defining year for cryptocurrency in India.

Co-operative banks keep RBI busy 

The central bank clamped down on several weak co-operative banks.

On April 22, it had cancelled the licence of Maharashtra-based Bhagyodaya Friends Urban Co-operative Bank Limited due to inadequate capital.

In May, it cancelled the licence of United Co-operative Bank Ltd, Bagnan, in West Bengal over its poor financial condition.

The PMC Bank depositors got some good news almost after two years. The RBI, on November 22, placed in the public domain a draft scheme for the amalgamation of the scandal-hit Punjab and Maharashtra Cooperative (PMC) Bank and Unity Small Finance Bank (USFB).

The draft proposes a takeover of the assets and liabilities of PMC Bank, including deposits, by USFB, giving greater protection to depositors.

Banking reforms remained stalled in 2021. The Modi government could not make much headway on the privatisation of public sector banks as trade unions mounted pressure.

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Tech glitches 

The year also saw banks grappling with technology issues as big players continued to report outages.

The RBI in August allowed HDFC Bank to source new credit cards, almost nine months after it ordered the private lender to put all new digital launches on hold till it resolved the tech issues.

HDFC was barred from launching new digital products or services and issuing credit cards as a penalty for repeated outages on its online platform.

‘Accommodative’ MPC

With the RBI’s monetary policy committee (MPC) sticking to an accommodative stance, it was another year of easy money.

The panel, headed by RBI Governor Shaktikanta Das, repeatedly said the focus was a sustainable growth recovery than near-term inflationary worries.

As the committee maintained the status quo, there were differences over the rate stance. Member Jayanth R Varma consistently voted against continuing with the “accommodative stance”, arguing that the efficacy of the monetary policy to fight the pandemic was limited.

New year, a new variant, same worries 

As the pain inflicted by the second wave was diminishing, the emergence of the more transmissible Omicron variant set off fresh worries.

The RBI has already warned about the possible risks the latest strain poses and its likely impact on the economic recovery.

Coronavirus, by all accounts, will again be the decisive factor, along with the asset quality, for the banking industry. Over to 2022.
Dinesh Unnikrishnan is Deputy Editor at Moneycontrol. Dinesh heads the Banking and Finance Bureau at Moneycontrol. He also writes a weekly column, Banking Central, every Monday.
first published: Dec 27, 2021 03:53 pm
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