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BRP Bhaskar: Two-faced banking reform
August 18, 2015
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Exclusive to The Gulf Today

A seven-point programme to revamp the banking sector, unveiled by the Government last week, has enthused domestic and foreign interests seeking accelerated economic reform but it overlooks the chronic problem of corporate default afflicting the public sector institutions.

Finance Minister Arun Jaitley outlined the programme shortly after the end of the monsoon session of Parliament. The government’s plan to push through some important reform-related legislation had fallen through due to continuous disruption of the two houses by the opposition.

Global rating agencies Standard and Poor’s and Fitch Ratings had recently pointed out that banking reform was necessary to achieve Prime Minister Narendra Modi’s growth targets. Large corporates were holding back new investments pending action by the government, they said.

India’s major banks are government owned. They were brought under the state in stages. The British-owned Imperial Bank, which handled government accounts during the colonial period, was nationalised in the eighth year of Independence. Banks floated by the former princely states were later made its subsidiaries.

With the takeover of 14 private banks in 1969 and six in 1980, as much as 80 per cent of the industry came directly under the central government.

At the government’s instance the public sector banks expanded rapidly into the countryside. They also tuned their lending policies to meet the needs of priority sectors identified by the government. There was political interference in their working even as they played their part in promoting government programmes aimed at inclusive growth.

When the country took the first steps towards economic reform in 1991, it recognised the need for a competitive banking system. The main issues were the small capital base and low profitability of the banks.

The government infused additional capital of about Rs 200 billion and allowed the banks to raise more from the market subject to the condition that the government’s holding should not go below 51 per cent.

New laws were enacted to improve the health of the finance sector and banks were asked to adopt global standards. At that time more than 23 per cent of all bank advances were classified as non-performing assets (NPAs). As a result of the measures that followed NPAs came down to 16 per cent by 1998.

In the wake of the East Asian financial crisis, the government initiated more measures to strengthen the banks. It also brought in a new law to regulate credit information companies.

By 2008, NPAs were down to 2.4 per cent. However, they soon started rising again and stood at 4.5 per cent last year. Also, as much as 12.9 per cent of public sector banks’ advances was classified as “stressed advances,” a term which includes NPAs and restructured standard advances. The corresponding figure for private banks was only 4.4 per cent.

The public sector banks certainly need to bring down NPAs. This is a task which can be accomplished without deviating from the policy of increased financial inclusion.

There is enough material in the public dominion to establish that the rise in NPAs is not a result of policies meant to help the disadvantaged sections of the society.

Public sector banks have been coming under stress from two sources. One is the ever expanding demands of infrastructure development, particularly in sectors like power, steel and transport. The other is wilful default by unscrupulous businessmen.

While announcing the reform programme, Jaitley noted that there was improvement in the highways, steel, power distribution and sugar sectors. He studiously avoided the issue of corporate default.

Last year the All India Bank Employees Association made public a list of 406 defaulting borrowers of 24 public sector banks. It said the top 30 bad loan accounts stood at Rs 703 billion..

Heading the defaulters’ list was an airline company floated by a liquor baron which owed the banks Rs 26.73 billion. Two jewellery firms in the list had a combined loan liability of Rs 31.57 billion.

The AIBEA said the public sector banks had written off Rs 2,040 billion in 13 years, restructured loans to the tune of Rs 3,250 billion, and run up fresh bad loans of Rs 4,950 billion. Demanding that the government release the names of the major defaulters and lay down stringent loan recovery norms, its general secretary, CH Venkatachalam said, “If there is a political nexus, let it come out. The people should not be punished for corporate default.”

The government has decided to bring in personnel from the private sector to head some public sector banks. The theory promoted by some circles that the private sector banks are good commercial models stands on questionable grounds. One or two of the successful private banks are known to have been involved in illegal transfer of funds to foreign locations.

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 The author is a political analyst of reckoning

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