By Brajesh Kumar Tiwari
In the last parliament session, the Union Cabinet cleared changes (Deposit Insurance & Credit Guarantee Corporation Bill 2021) to the deposit insurance laws to provide funds up to Rs 5 lakh to an account holder within 90 days in the event of a bank coming under the moratorium imposed by the RBI. The government has also permitted raising the deposit insurance premium by 20 per cent immediately, and maximum by 50 per cent.
The Indian banking sector is resilient, sufficiently capitalized and well-regulated segment. Over the last 7 years the NDA government has been infusing capital into the public sector banks using recapitalization bonds. However, following COVID and the expectations from the Union Budget 2021-22, liquidity has become a huge issue. Since the last few years, several European banks have confirmed certain disposal operations of impaired loans. This has largely contributed to a significant reduction of the NPL ratio. However, the birth of a huge secondary market for bad debts and the unification of standardized large-ticket assets in order to construct a ‘single-name’ portfolio has given way to newer problems. In fact, the banking sector is silently reeling under the challenges thrown towards it, which are:
Maintaining Capital Adequacy: The capital a bank sets aside for its rainy day or to undertake lending activities acts more like the bank’s risk threshold. However, in the post-COVID world banks are facing fresh ambush of NPAs on unsecured loans. Earlier RBI has offered moratorium on loans and has also announced the two-year restructuring on loans to safeguard weak borrowers, but this situation hints at the NPAs increasing from 7.5 per cent in September last year to 13.5 per cent by September this year, putting a lot of stress on banks. Unless the government pumps in money externally, banks will be in severe loss creating massive capital adequacy problems. Bad loans and in failing with maintaining the minimum RBI prescribed Capital Adequacy Ratio, banks will have to face severe challenges in due course. Moreover, the Basel IV standards that limit the reduction in capital is due to be formalized in January 2023. Earlier, following the global financial crisis of 2007-08 the international implementation of Basel III was formalized and that has already raised the capital adequacy quotient for banks in order to mitigate risks. Now, Basel IV, according to global banks will raise the bar of capital further, which is definitely a sign of worry for India, given its present state.
Maintaining Asset Quality: Bad loans are a big problem for the Indian banking sector, especially the PSBs. As per an IMF report 36.9% of the total debt in India is at risk and banks have capacity to absorb only 7.9% loss. Add the COVID crisis to this and the banks are struggling to recover loans from small businesses, which have been severely affected by COVID. The pandemic has put a halt in business all across, so loan recovery is a big question mark, which definitely hurts the banking sector as they struggle to maintain the quality of their assets.
Maintaining Growth: The overall economic growth of the country is shunted at the moment and an outward push can only help every contributing sector of the economy –corporates, retail, and rural prominently. The growth impetus is financial at the moment and the sooner the sectors recover, the healthier it will be for the banking sector. As of now, the banking sector has no way of fulfilling its growth aspirations and is barely struggling to stay on ground.
Keeping these top 3 challenges in mind, here are a few suggestions for the banking sector in India, which will help them revive their status.
Things to work out in short term
- Restructuring: RBI’s restructuring guidelines on loans for individuals and businesses not only work as a relief for the borrowers, but it also gives a scope to banks to maintain their status quo. Banks should use this relief period to improve their asset quality while continuing being a pillar of support to the MSMEs. This restructuring is RBI advised and the framework keeping in mind the benefit of the banks and customers have been specially devised and has come in to effect since April 1, 2021. Since the regulatory guidelines for the loan restructuring are RBI directed so the implications of customers delaying payments will not come harshly on the banks. This gives the financial institutions a chance to reorient themselves.
- Lower interest rates on loans: The COVID crisis has pushed the economy to go off track and financial shortages is an evident problem all across. Constant cash flow is a problem with both the service sector and as well as individuals. Indian banking sector should use this premise to their credit and begin offering lower interest rate loans to individuals and MSMEs. This will encourage lending, which will stimulate overall economic growth and give banks a chance to improve on their CAR. Reform has already started in the home loan finance space, interest rates for home loans in India at present have fallen to historic lows. What was around 8.40% during September 2019 is now at 6.49-6.95% range.
- Improved diligence: While it is necessary to pump in more money in to the system to help sustain businesses and to boost the economy, it is also equally a necessity to keep bad loans at bay. Bad loans lead to higher NPAs over time, so due diligence has to be observed when offering funds. This will help keep frauds and unscrupulous people at distance and the banks will then be able to extend money to rightful and needy businesses or individuals. Proper scrutiny and stringent application measures will help avoid wrongdoings. Moreover, banks should be cautious when giving loans to Indian companies who have heavily borrowed abroad. This is because according to RBI, this will put banks under unnecessary exposure to dollar and will further add to their existing pool of problems.
Things to work out in long term
- Technology upgradation: Digitalization is the buzz word for businesses and banking, especially PSBs should adapt to the concept of digital to make banking operating seamless. Technology will make or break the way people look at services in the coming time, so banks should ride the bus before it leaves the stop. From adding top-notch technology to upgrade services to upgrading existing set-up, a lot of opportunities lies in technology and harnessing the same will help bringing in a big change in approaches.
- Technology reach: Tech inclusion and tech literacy campaigns should be undertaken to ensure that paperless banking or basic tech services are so easy to use that it is available/accessible and usable to all. This is not undoable. If people can order products on Amazon, use Facebook, why not banking services. Of course, with appropriate security measures in place.
- Focus on MSMEs: Banks, including PSUs are primarily keeping their attention on retail advances or corporates today. The banking sector mostly chooses to ignore the MSME advances. This trend is not healthy for the economy and will not help banks grow in the days to follow. MSMEs are the backbone of Indian economy and creates employment for 70 million people. This sector has a 16% contribution to the Indian GDP, which as per reports is to become 25% by 2022. Certainly, the prosperity and growth of this sector will help leverage the economy and give it a prosperous enrichment.
- Customer-centric Innovation: Innovation is key to customer loyalty in today’s day and age and in order to win customer loyalty in long term, banks should focus more on innovation. Keeping pace with the changing environment and other industry practices the banking sector should invest in innovation that will help them serve their customers with ease. The more agile the services and banking practices, the easier it will be for the customer to bank with the partner.
The pandemic has been an eye opener for everyone in some way or other. However, counting in the positives of the pandemic there is a chance to relook at the economy. This is the right time to repair and reorient as we prepare for a better tomorrow.
(Brajesh Kumar Tiwari is the Author of “Changing Scenario of Indian Banking Industry” Book; Associate Professor Atal Bihari Vajpayee School of Management & Entrepreneurship (ABV-SME); Member (Innovation Council, JNU); Jawaharlal Nehru University (JNU). Views expressed are the author’s own.)