Ramping up the Banks: India Needs To Do Something More… Crisis or No Crisis
The anniversary of banks’ nationalisation in India passed off on Sunday. Smiles were Scarce; no one would talk of the village adoption scheme; no chairman would go to a village these days to see how their rural branches are helping the farmers or how the medium, small and micro enterprises (MSME) sector is being financed. There is neither pride in ownership, nor regret for bad governance. 
 
But for a full-page pull-out by the All India Bank Employees’ Association (AIBEA) on 20 July 2020, who remembers the bank nationalisation day? Neither the employees, nor the disappointed customers that include even the banks’ own pensioners, nor those seeking credit from them recall the day. People are only alert about wearing masks and sanitising their palms before handling the currency received from outsiders. Everyone cries wolf on the ever-bulging non-performing assets (NPAs). The only solid reform that we can boast of is the Insolvency and Bankruptcy Code (IBC). Job creation is hurt badly in the organised sector with near-65% of MSMEs shutting their windows in the pandemic. Their markets are yet to revive.
 
Banks in UK, Iceland, and even the US resorted to the most criticised and least preferred route of nationalisation of banks, when they confronted a crisis. Then, the Obama initiative that received positive response from stock markets since the announcement of the toxic loan basket takeover under a joint government-private fund, was, however, inadequate to retrofit the lost confidence in the financial system.  
 
The revival of ‘protectionist’ actions would seem to be asserting more in finance than in trade.  While the regulators of G-20 would be meeting shortly, the global regulatory regime has serious limitations and they should be realigned with domestic regulations that have compulsive cultural characteristics.  
 
Events so far have proved beyond doubt that a global regulatory regime would not be able to provide appropriate solutions to the type of recession that has set in due to the pandemic. No prediction as to when it would end makes sense. Annual balance sheets for 2020 are waiting for finalisation in several institutions. Basel III may have introduced a modicum of discipline and uniformity in risk discipline among banks globally. Several regulators sought more flexibility. It is important for India to realise its distinction in the emerging economic scenario and how necessary it is to turn the head on the screws. 
 
At the commencement of COVID-19 attack, India did well and even till now, we do not find people scrambling for food because farmers and rural India stood by the nation. The biggest blunder of the system is more announcements than actions and imperfect monitoring and undependable statistics. All the rating agencies, International Monetary Fund (IMF) and World Bank kept the ratings low and estimated a growth of 42% in 2021. Opening the economy with a lot of courage has not been taken too kindly by coronavirus that has been surging every day crossing the one million mark. India took the 4th rank the world among the coronavirus affected nations.
 
Second, our key sectors like steel, zinc, other metals and coal as also the transportation system largely in the public sector. We entered the commodity markets and derivatives markets in our anxiety to mix with the globe. World Trade Organisation (WTO) is nearing collapse with most countries choosing to adopt policies that secure their own nations and people, not caring so much for the global discipline.  
 
Third, there was no demand recession of the magnitude that the other countries in the globe faced. Rural areas, where still 65% of our population lives, drive the demand growth.  Having said that, here are some facts that can be hardly ignored: there is a steep decline in job growth; steep declines have also set in in the private sector trumped up by the global recession; the urban and metro retail chains took a severe beating; the real estate and housing boom that irrationally stepped up land values across the country took the first heat-stroke and with them, the dependent MSME sector that is seen as the engine of growth. 
 
Fourth, banks that lent heavily for the retail sector and real estate sector started facing continuous decline in their performing assets. They lost confidence in the resurgence of the demand and the productive capacities of the manufacturing sector.  Most public sector banks even refused to go with RBI’s advice to pump in credit. 
 
Atmanirbhar Bharat Abhiyan, the stimuli announced to combat COVID-19, injecting more than Rs20 lakh crore liquidity, still faces risk aversion from the banks. This high liquidity released only moved to the investments in treasury instruments and to quote Subba Rao, former governor, gave confidence to depositors in the banking system that their monies are safe with the banks, notwithstanding the PMC Bank resolution still waiting at the doors of the RBI. It has two windows: one, investments and the other credit. 
 
The latest report on investments, notwithstanding the $10mn investment announced by Google, shows that all the investment projects are reported to be lagging behind and the cost over-run of the projects has already swallowed the entire incentive package. 
 
MSMEs are yet to come out of the two shocks of demonetisation and the goods and services tax (GST). After the redefinition, and after a host of digital platforms placed within their reach, the access to credit by all counts is a poor show. Out of the National Credit Guarantee Trust linked credit incentive to the standard assets, banks disbursed only 50% or less. This was supposed to be automatic release of 20% additional working capital. The second window to the stressed assets through sub-ordinated debt is yet to open as the operating instructions were received only a few weeks back.
 
Size – An Irrational Concern 
Merger of PSBs taken up while the economy was slowing down is yet to show up the results. The market value of the State Bank of India (SBI) post-merger is way behind its peer, HDFC in the private sector. Sanctioning Rs1,200 crore to a known defaulter in its books and erstwhile chronic NPA resolving through the IBC, does not hold SBI in any high esteem either among global peers or its own clients. Government of India, by merging PSBs to 10 from 28 did not gain either in image or confidence of the people. Several clients say that corruption has become endemic in PSBs and not even acknowledging a complaint, or a letter of a customer is so habitual that the latter are in the lurch.
 
While the government’s efforts to digitise the delivery system have borne fruits reasonably well, going by the way the Mahatma Gandhi National Rural Employment Guarantee (MNREG) wages and other direct benefits reached the intended groups during the past two years, financial inclusion remains way behind. The reach of the banks to the poor has declined. 
 
 
Regulator’s job is to make sure that the vertical and horizontal growth of institutions should not be allowed to go with a feeling that because of their size they are insulated from collapse and that the government and the regulator must do something to keep them afloat even in the worst event like bankruptcy.  This is where the RBI should reformulate its views and ensure that the organisational structures, irrespective of their affiliations, do not overburden governance and do not oversize banks. 
 
The silos-based regulatory system currently in vogue, with the banks and the non-banking finance companies (NBFCs) being regulated by the RBI, stock markets by the SEBI, pensions by the pension fund regulatory development authority, insurance by the insurance regulatory development authority, and commodity futures by the futures market commission, should be effectively brought under a financial services regulatory authority. 
 
Department of financial services, Union ministry of finance may have persons of eminence but when it comes to examining micro issues for macro management, it leaves a lot to deliver. Collective wisdom needs to emerge to improve financial regulation and a governance that affects 130bn people, brooks no delay.  
 
India, for example, does not have credit risk insurance of the order prevailing in either Italy, or Germany or South Africa. The credit guarantee trust for micro and small enterprises is but a poor cousin of the trade and credit risk. Credit risk could not be introduced in India as the IRDA was apprehensive of the consequences of credit default. It is perhaps of the opinion that the moral turpitude would reach new dimensions if credit risk is introduced.  
 
Percy Mistry Committee called for a unified regulatory architecture for resolving issues dealing with segmentation of financial markets into banking, capital markets, insurance, pensions, derivatives etc. Sweden, Singapore, UAE, UK, the Republic of Korea, to cite a few, have already moved into the unified regulatory system. 
 
Operational Issues
Warren Buffett, the most reputed investor, is quoted at a number of places: “Derivatives were financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Over-the-counter derivatives that are off-balance sheet instruments come to the surface suddenly when their collaterals fall and when their values become riskier to hold, killing in one stroke the rest of the healthy assets of the banks. The delivery and recipient systems have not reached a level of maturity to play with them, even a decade after their active entry.  Indian financial system cannot afford the consequences of systemic risks arising from their instrumentality. 
 
Let me go to the most familiar area – credit risk, that is mostly understood as risk of default.  Here the risks arising from asymmetric information have not been dealt with. The Credit Information Bureau India Ltd (CIBIL) is the only institution that currently unfolds a client’s historic information at a price. Entry of multiple players with the enactment of Credit Information Services Act of 2005 is put on hold.  
 
Trade and credit information services should enter the competitive domain for the information system to get into a semblance of order.
 
Credit rating agencies in India that are approved by the RBI are none other than the Fitch, Standard’s and Poor (S&P) and Moody’s., whose ratings busted on the threshold of sub-prime crisis and beyond.  There is no proof that they are doing their job differently.  Until the rating agencies’ services are paid for by the financing institutions that make use of the ratings and hold them accountable for the ratings, there is no guarantee that the ratings per se would add to the quality of the credit portfolio the banks carry in respect of the rated assets. 
 
While the government and the RBI, insurance and capital market regulatory authorities have proved their one-upmanship over the other regulatory authorities in reasonably insulating the Indian financial system from the impacts of the current global crisis, a large gap remains in what is needed to be done. The time to put things in the right shape is now and right away. 
 
It is high time we appointed a high-level committee that should also include outside experts to clean up the banking system with an open mind.
 
(The author is an economist with three decades of banking experience and a risk management specialist. He can be reached at [email protected] The views are author’s own.)
Comments
rameshnair.rcpl
7 months ago
Yes you are for the first time understand and express the exact problems with our banking.But there is nobody other than money life to question the banks.govt.was considering some check on banksters but no action on that.Dont know if govt.is hand in gloves with the banksters
Ramesh Popat
1 year ago
too much written on sickness of psu banks!
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