Public sector banks should be made NPA free

The strength of the Indian economy has been a reliable banking system and the parallel economy. The 11 public sector banks (PSB) are suffering from a loss of Rs 31,688 crore and needs another Rs 1 lakh crore capitalizations.

This is in addition to Rs 90,000 crore already recapitalized.

The parallel economy – not black – is facing a crisis affecting the rural, MSME and retail markets across the country. Many southern chief ministers have expressed their concern in their discussion with the 15th finance commission.

The central government and the finance ministry are equally concerned. The RBI has put 11 banks in the ‘prompt corrective action’ category. It means moratorium on dividend and be prepared to put more capital.

The parliamentary committee on finance is set to call RBI governor in June to understand the issues of NPA that has now touched 10 percent of the banking capital.

The banks for decades have been supporting government programmes like food for all, road constructions and other infrastructure programmes. Even the private sector benefited but it also amassed huge unpaid debts leading to the present crisis. The Economic Survey 2016-17 has mentioned that 50 large corporate houses have been responsible for huge NPAs.

This is apart from the problems the private banks like ICICI are facing.

Finance minister Piyush Goel has assured the banking sector that the centre would act to reactivate and rescue the PSBs. Since the 2007-8 sub-prime crisis, that did not hit India, the UPA government started incentivizing industry. The industry took large loans, which they did not require and for whatever reasons defaulted on repayments.

The bankers said that weak laws did not enable them to recover the money. Since the banking and bankruptcy laws have been strengthened. But 12 years of problems are not to be solved with that ease. The recovering loans itself is an expensive proposition.

The SEBI meanwhile has warned Punjab National Bank for delayed reporting of the $ 2 billion fraudulent transactions allegedly carried out by Nirav Modi and Gitanjali group of companies. There are many private banks which have slipped into a crisis situation. The myth that private banks were better has been busted.

Banking is supposed to be a growth facilitator. But if the savings remain at a low level, as it has been witnessed during the past few years, the repayment of loans are not there and banks suffer from internal weaknesses, as was evident from the Nirav Modi or Vijay Mallya incidents, the economic trajectory cannot remain healthy.

Another aspect that the banks have ignored is the medium, small and micro enterprises (MSME). It is the lifeblood of the Indian economy. Its share of the GDP is around 30.7 percent. The MSME constitutes only 16 percent of total bank credit as smaller enterprises lack access to formal credit. They depend, according to Free Press Money Control study, on self financing – 78 percent, and 22 percent is accessed from local financier, institutions, and government help (7 percent).

The MSMEs face credit shortfall of Rs 2,000 crore. The large banks are still not properly geared up to meet their needs during odd hours. They take loans at higher interest rate and try to repay the same day. This happens with small retailers, vendors and farmers. The money is easily accessed and returned quickly. The risk factor is minimal.

The micro finance is not considered a lucrative area by the large bankers because of its unstructured nature and the feeling of it being cumbersome. This has caused problems for MSMEs. The banks have lost an opportunity, which could have helped them having a dependable clientele. The MSME is stated to be the most capital-efficient segment in the economy.

It also unravels the fact that Indian bankers are least innovative. For the future of banking, the banks would have to include greater participation of the MSME. They would also have to change their timings to suit the unorganized sector. The rules of the game have to be modified. The universal banking has become a myth enmeshed in too many formalities and least functioning.

The bankers over the years have not looked for new avenues. The PSBs constitute around 55 percent of credit; private sector banks 19 percent, NBFCs (non-banking finance companies) 17 percent; cooperatives 7 percent; and regional rural banks 2 percent. This is an indication that credit growth is moving away from public and private banks.

The PSBs as the recent discussions in the finance ministry indicate cannot depend on recapitalization with government – taxpayers’ – money.

The low-income groups, despite Jandhan accounts, remain outside the purview of formal banking. They pay the highest credit costs. They need to be included into the formal lending structure.

The RBI also understands that small finance banks, with a different view and focus, should have different regulatory compliance. The purpose is to allow the small finance banks to focus on the unbanked customers and MSME segment so as to facilitate financial inclusion.

The small finance banks have their own problem. They borrow from large banks to lend to their clientele. It makes their operation expensive and so they charge higher interest rates.

An idea floated by former RBI governor Raghuram Rajan, is to create a competitive loan market as it is believed competitions benefit the customer. This could lower their interest costs and with better monetary health they would be help the nation grow faster.

The issue is how the large banks would be a player in this segment, which has different pattern. The RBI basically says that small finance banks would ensure acceptance of customers which were not hitherto considered creditworthy. This is a suggestion to the large bankers.

If they enter this area, they would have a vast market. Before doing so they would have to adapt to small market practices and be quick to give loans and accept repayments on a daily basis. This is not the forte of the PSBs or private banks. It is often left to chit-fund-type NBFCs, whose credibility is at the lowest.

The banks have enormous opportunities around. They would have to come out of the cocoon, move as foot soldiers into the market with loose targets. The modified functioning can open up large fields and if it functions properly, the recapitalization should not be a problem.

(Views expressed are personal)

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