Modi@9: The unmaking and making of Indian banks to face global challenges head on

In its second term, the Narendra Modi government’s law ministry navigated a series of challenges, the toughest being the pandemic.

The Narendra Modi-led government is about to turn nine and the next general election is scheduled next year.

Modi's second term at the helm of affairs has largely been a tale of trounce and triumph for the Indian banking industry with the pandemic leaving it bruised and battered in 2020 and their resilience remaking them robust enough to face the global headwinds by 2023.  The overall health of banks improved significantly between 2019 and 2023, indicating that they are better equipped now to deal with risks such as the one recently unfolded in the US banking system.

The Covid shocker

The pandemic-induced lockdown pushed the industry to a phase of uncertainty in 2020 with most business activities coming to a grinding halt, small business suffered a dreaded blow as consumers deferred their discretionary spending. Moratorium announced by the central bank for stressed borrowers and significant liquidity infusion, along with a raft of measures announced by the government, saved the industry form a bigger crisis.

Consider these numbers. In response to the second wave of the pandemic, the RBI announced additional liquidity measures amounting to Rs 3.61 lakh crore during 2021-22, which took the total announced amount of primary liquidity offered since February 2020 to Rs 17.2 lakh crore or 8.7 percent of the 2020-21 nominal GDP.

Overall improvement in numbers

In terms of key financial parameters, Indian banks recorded an overall improvement in asset quality between 2019 and 2022. The gross non-performing assets (GNPAs) for the lenders went down to around 4.5 percent in December 2022 from 11.6 percent in March 2018. The capital adequacy ratio of banks improved in sync to 14.6 percent as of March 2022.

These numbers clearly show that the banks are in a much healthier position now. Even the traditionally weaker state-run banks have ramped up the capital base and cut down the bad loan stock. This also meant that the government didn't need to infuse fresh capital in PSBs.

But, how did the NPAs fall?

There are two reasons to this. The asset quality review (AQR) of the Indian banks initiated by the Reserve Bank of India (RBI) in 2015 played a critical part in cutting down the hidden NPAs in banks. The banks were forced to disclose all bad loans and adopt measures for early identification of stress. Second was the huge loan write-offs conducted by banks during this period helped to show lower NPAs on their books. India's scheduled commercial banks (SCBs) wrote off Rs 10,09,511 crore during the last five financial years, according to data submitted by the government in Parliament.

Also, the banks have pushed some major cases to the bankruptcy courts that too contributed to resolution. Some 6,571 Corporate Insolvency Resolution Processes (CIRPs) had commenced by the end of March 2023, data from the Insolvency and Bankruptcy Board (IBC) of India showed. Of these, 4,515, or 69 percent, were closed, the Insolvency & Bankruptcy Board Of India (IBBI) said.

Who wrote off, and how much?

The country’s largest lender State Bank of India (SBI) wrote off Rs 2 lakh crore in the last five financial years, while Punjab National Bank (PNB) wrote off Rs 67,214 crore loans in the last four years, followed by IDBI Bank's Rs 45,650 crore. Among private sector lenders, ICICI Bank wrote off Rs 50,514 crore of loans and HDFC Bank Rs 34,782 crore. A write-off happens when banks lose all hopes of recovery from the asset and provides (set aside money) for it from its own books.

Such loans are technically off the balance sheet, giving a fresh start to the lender to rebuild the book. But such unresolved stock of bad loans remains within the financial system; just that banks are off the burden of this toxic stock. Now, what will happen to this stock of written off loans? These are as good as gone money in most cases. Resolution of such assets is typically extremely tough.

Pending reforms

While bank balance sheets look much cleaner now, the progress on the reform-front has been rather slow. The last major reform in banking was the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016. The other big-ticket reform agenda, privatisation of state-run banks, is still a work-in-progress. All that has happened so far is a mega merger of 10 state-run banks into four in 2020 and a forced buy of IDBI Bank using India's largest insurer Life Insurance Corporation of India in 2019.

According to a report in the Economic Times, the government may set up a panel to prepare a fresh list of public sector banks that can be privatised and also revisit its bank privatisation strategy after state-owned lenders turned profitable and several rounds of consolidation reduced their number.

From the point of view of banking industry, the biggest challenge for the government going ahead will be taking the reform agenda forward particularly in the context of privatisation. For this, the Narendra Modi-government will have to undertake a much bigger consultation exercise with various stakeholders, including influential trade unions and investors.