What ails the Indian Banking system? John Maynard Keynes worked in the India Office in 1906, in the Military Department and the Department of Revenue, Statistics and Trade of the British Empire’s administration. After leaving the civil service in 1908 he lectured on Indian monetary problems at the London School of Economics and the University of Cambridge. It is interesting to revisit his observations, on our monetary transactions, financial and banking systems for some useful lessons.
The Indian banking sector has been greatly stressed in the past few years, with non-performing assets (NPAs) steadily climbing from under 3% to over 15% of total assets. Though some of the factors are external, such as decreases in global commodity prices leading to slower exports, others are more intrinsic. The telecom, power, real estate and Infrastructure sectors seem to have contributed in a large measure. In fact, India’s banking system lost $24.8 billion due to non-performing loans of 416 defaulters being written off. The increased NPAs put pressure on recycling of funds and reduced the ability of banks for lending more and thus resulted in lesser interest income contracting the available money stock.
The crisis of the non-performing assets (NPAs) is being seen in all banks, whether scheduled commercial banks or the co-operative sector banks, particularly the urban co-operative banks. The Punjab and Maharashtra Co-operative (PMC) Bank crisis, which has left lakhs of depositors unable to access their lifetime’s savings, has alarmed customers of other banks as well. It is now facing regulatory actions and investigation over alleged irregularities in loan accounts given to financially stressed real estate player Housing Development & Infrastructure Limited (HDIL).
Infrastructure Leasing & Financial Services (IL&FS) is a non-banking financial company (NBFC), or ‘shadow bank’. Established over 30 years ago, it funds infrastructure projects across India. Among its shareholders are LIC, SBI and many others. After a series of defaults on its obligations and alleged fraud in its transactions, the group is sitting on a debt of Rs 94,000 crore, awaiting redemption. The Yes Bank, India’s fifth largest private sector lender, is in the middle of a crisis as the RBI has taken over its affairs and placed strict limits on its operations. A single thread that runs through all of them is accumulated NPA’s.
In September last year, consolidation of 10 public sector banks into four mega state-owned ones, was announced ostensibly to help in better management of capital. Was this for some banks, saddled with bad loans or weak operating metrics, to emerge stronger when integrated with stronger, more efficient banks, or pull the stronger ones down, only time will tell? Would these banks also have collapsed under their NPA weight without the mergers? Why were badly doing PSU banks like the PNB, UBI with their asset class worse than YES bank merged with other state-owned banks? Would this move ensure safety of depositor money? An immediate fallout However, will be the retail customers including account holders of amalgamating banks being affected.
Though the government has pumped in billions of dollars to help debt-laden state lenders in exchange for them implementing reforms, public sector lenders are said to have the highest exposure to bad loans. The impact of Yes Bank moratorium would possibly have a cascading impact on every other private bank. There are several questions that seek credible answers. Culled out from the annual report of Yes Bank, the total advances have only risen from 55632.96 Cr to 75549.82 Crores to 98209.93 Crores to 32262.68 Cr to 203,533.86 Cr to 241,499.60 Cr through the years 2014 to 2019, year on year. Why was the crisis not averted earlier when the loan portfolio of the Yes Bank increased by 434%? Once the 30 day deadline ends, why would any depositor trust his money with the YES bank? Who would fund a liquidity mismatch, especially when depositors can pre-maturely withdraw, without the lenders paying early? What would happen if there is a run on the money not just in Yes Bank but all similarly placed private sector banks? If the intention was a bailout, would it not have been better to have SBI invest in tier 2 capital without eroding the trust in the bank? As on June 26th 2019, the SBI, the country’s largest bank, had 73% of its bad debts from the industry sector, followed by Allahabad Bank at 70%.
Though it is welcome that the RBI is actively seeking to protect the investors’ money in the YES bank, why treat the other private banks like the PMC and the ‘Raghavendra Sahakara Bank’ differently? Is RBI acting fair between a private bank and a PSU bank? Why then should any depositor trust any private bank with his/her money? Is our money really safe in the PSU banks with so much uncertainty?
How prudent is it to push SBI & LIC in these bailouts? Doesn’t it effect their credit rating and operational efficiency? In fact, the market seems to have thumbed down the move. The total market cap of SBI is about 2.4 Lac Cr. While SBI is investing 2450 Cr, its own Market cap fell by about 16000 Cr after its stock fell by 6.24%. It is these forced interventions imposed on SBI that makes it vulnerable in the market. It appears as though the move will have a very serious impact on trust, operation and even survival of private sector banks in India.
Priority must always be depositors and not shareholders. This is following the Global Trust Bank route, where depositors were secured while investors lost out. Is the SBI not funded ultimately by the taxpayers? In a way are the taxpayers being taken to task at the end of the day?Top of Form
We need to clean up the banking sector fast, else the economic growth will falter even more. A vibrant economic growth in excess of 5%, creates new jobs and accelerates the employment sector. Like a former RBI Governor said, the clean-up that has been started, must be completed fast. He further opined that though recapitalization has to be done, it also has to be done in the non-bank financial sector, which is seizing up lest the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities comes to a screeching halt.