Finance Minister Nirmala Sitharaman has her task cut for the Indian banking sector in the upcoming Budget. There are quite a few long-pending issues that need to be fixed to put Asia’s third largest economy back on track.
State-run banks will require substantial capital infusion to resume lending to productive sectors once demand picks up, analysts said. Over the last five years, these banks had to set aside over Rs 4 lakh crore in provisions towards bad loans. In comparison, private sector banks’ provisions for bad loans during this period totalled Rs 88,000 crore.
“There is not enough credit demand at the moment. But that may not be the case next year when growth begins to pick up. Banks need to be funded well to resume lending to industries,” said a banking analyst.
Since coming to power in 2014, the Narendra Modi-government has pumped in around Rs 2.8 lakh crore in state-run banks. In FY20 so far, the government has infused close to Rs 70,000 crore as capital. But that was inadequate considering the fact that banks required a substantial chunk of money to clean up their bad loans besides meeting their Basel-III requirements.
Recently, PTI reported that the government is unlikely to announce capital infusion for the PSBs in the upcoming Budget. Instead, the government wants banks to expedite recovery of bad loans and raise funds from the market. The government also wants state-run banks to sell their non-core assets and generate money.
In a normal scenario, these suggestions make sense. But, at this point, the state of the sector is far from normal. There won’t be too many takers for state-run banks in the market, except for the likes of SBI.
The gross non-performing assets (NPA) levels of banks have slightly eased from peak levels but still constitute about 9.3 percent of total loans. An RBI report recently stated that gross NPA levels could touch 9.9 percent by September. In simple words, this means that banks will require additional capital this year to make provisions. The Budget needs to address this issue.
Privatisation, not merger
The government has been averse to the idea of privatising state-run banks. Instead, it has only resorted to merging smaller, weaker banks with bigger ones. But experts, including former RBI governor Raghuram Rajan, have argued that merger of weak banks will not solve the problem of governance issues and lack of autonomy. Besides merging a weak bank with a strong bank could even impact the health of the big bank.
The only major bank acquisition that happened in the recent past is the LIC-IDBI Bank deal. But this cannot be termed as a case of privatisation since LIC is a government-owned entity. In a highly competitive market, a fiscally constrained government cannot continue with the ownership of state-run banks. It will have to look at options to gradually cede ownership control in some state-run banks. Sitharaman could use her Budget speech to lay out a roadmap for privatisation of public sector banks (PSBs).
Better risk managementThe government should also look at the loopholes in the risk-management systems in PSBs. State-run banks continue to have weak risk management tools and remain vulnerable to frauds. According to RBI data, there have been over 5,000 incidents of frauds, totaling close to Rs 96,000 crore, in public sector banks during H1 FY20.
The RBI has initiated steps to ring-fence the banking system from fraudsters such as revising the rules for co-operative banks. But the government will have to bring in legislation to overhaul the governance structure of the co-operative banking sector more effectively.
The regulator should also take steps to significantly increase the limit of deposit insurance scheme, which is just Rs 1 lakh per depositor at present. In the event of a bank failure, this will prove to be severely inadequate. The insurance cover needs to be upped to give protection to all depositors.Get access to India’s fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code “GETPRO”. Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.
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