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Last Updated : May 17, 2017 08:15 PM IST | Source: Moneycontrol.com

3 years of Modi: Banking sector reforms announced; results awaited

In an attempt to help banks, especially public sector banks (PSBs) recognise the ashes of high level of non-performing assets (NPAs) and rise like a phoenix, in December 2015, the Reserve Bank of India under the leadership of former Governor Raghuram Rajan, asked banks to set aside a pool of funds in the form of provisioning towards sub-standard assets. This further dented the banks’ balance sheets.


Banking sector in the last three years under the Prime Minister Narendra Modi-led government may well have seen some big announcements but going just by the financial numbers in the banking sector may present a dark picture of the performance.

However, it may be said that the skeletons were waiting to be out of the cupboard.

In an attempt to help banks, especially public sector banks (PSBs) recognise the ashes of high level of non-performing assets (NPAs) and rise like a phoenix, in December 2015, the Reserve Bank of India under the leadership of former Governor Raghuram Rajan, asked banks to set aside a pool of funds in the form of provisioning towards sub-standard assets. This further dented the banks’ balance sheets.

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Most banks, the backbone of the economy, have been saddled with heavy bad loans hitting at their profitability for nearly two years now. To put a perspective, 28 public sector banks reported a collective net loss of Rs 17,993 crore in 2015-16, government numbers suggested. Of them, 14 banks including the second and third largest banks registered net loss in their books for the same financial year.

So, the Modi government inherited, inter alia, weak banking sector drowned by NPAs due to non-repayment of loans by big corporates suffering from stuck economic projects, a rigmarole legal system for debt recovery, incompetent bank chiefs elected by political interference and about 50 percent of Indians still excluded from access to formal banking channels.

The first two years with Modi at the helm did see announcements of Prime Minister Jan Dhan Yojna (PMJDY) in August 2014 and passage of the Insolvency and Bankruptcy Act in early 2016 in order to increase banking access and resolve stressed loans by speeding up the legal process.

Having secured its financial inclusion achievements under PMJDY in the Guinness Book of World Records for the biggest financial inclusion initiative in the world with banks opening 11.50 crore accounts, covering 99.74 per cent of the households, access to major banking services is yet to see much light.

The resolution of stressed loans or NPAs and potential ones, which is the government’s biggest endevour, have met with many decrees including the bankruptcy code and mechanisms set out by RBI such as strategic debt restructuring (SDR), joint lenders’ forum (JLF) and Scheme for Sustainable Structuring of Stressed Assets (S4A) among others. However, most have failed to bear the desired result so far.

Last one year saw other major announcements like setting up of the Banks Board Bureau and introduction of a framework for accountability in banks by professionalising the PSBs and having revised performance indicators for banks to get capital infusion.

On the PSB leadership positions, even as the government had made changes in the form of CEO and Managing Directors instead of Chairmen in 2015 and hiring some private sector professionals, last month the Finance Ministry again reshuffled some of those existing PSB chiefs and made new appointments.

In April this year, the Modi Government made the biggest reform announcement by amending the Banking Regulation Act and passing the NPA ordinance empowering both the RBI and banks with the help of oversight panels and independent professionals to shield bankers who fear pull up and interference by the legal agencies especially the 3 Cs – CBI, CAG and CVC – which had hampered hard decision making.

Bankers and other experts see the government’s intent given these announcements and efforts including to bring the most notorious loan defaulter businessman Vijay Mallya to book.

While experts view the ordinance as a step towards more transparency, time-based resolution of stressed loans and higher decision making capacity by bankers, the implementation is yet to bear fruits. Today, PSBs in total have a stressed loan ratio of 12.3 percent, much higher than their private sector peers.

Also, no more willing to handhold the weaker banks, the Finance Ministry has proposed consolidation in the banking sector to weed out weaker and smaller banks with only 5-6 big banks to remain in existence.

This process has been kickstarted with country’s largest bank State Bank of India having merged its five associates and the all-women Bharatiya Mahila Bank with itself from April 1. But other banks may still be exploring the option to get the right match and price.

Further, the Centre is pushing for affordable housing loans with Credit Linked Subsidy Scheme (CLSS) and aggressive thrust on digital banking transactions aided by the sudden cash crunch due to demonetisation announcement in November that rattled the banking system which is encumbered with credit growth at multi-year lows of sub-5 percent.

In October 2015, Modi said the entire banking sector is undergoing major transformation with the advent of latest technology. "We have to take the country in that direction. As we use technology, we move to paper-less banking, currency-less business operations; the possibility of black money will gradually become negligible," he said.

While black money becoming negligible may still be hovered with lot of unanswered questions, digital push saw a slight decline since February even as it is showing a growing trend.

Modi government may have well-positioned itself for the 2019 elections from industrialists and bankers having shown the intent with many big and small announcements in the banking sector.

However, “achhe din” for the banking sector will be only when its implementation, in especially resolution the bad loans, will clean their balance sheets and the bottom of the pyramid gets loans from banks avoiding the money lenders’ wrath.

Full coverage: Three years of Modi government

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First Published on May 15, 2017 08:14 am
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