Neither the $2.6-trillion GDP, overtaking France, nor the EoDB rankings bring cheer to a banker on the 49th anniversary of bank nationalisation. For a wide range of customers, the trust in banks is dwindling by the day.
The current decade witnessed deep decline in the credit-to-GDP ratio, from 22% in FY12 to 16% in FY18. But the same CMIE data tells us that retail lending including home loans moved up from 9% to 11.4%. Bankers are having a chill up their spine with the recent arrests of a few top executives for their allegedly wrong decisions of the bygone years. The challenge before chairpersons of banks is to find a general manager to hold the credit portfolio.
When farm loans went bad, they had natural calamities to lean on; when small enterprise loans go bad, they slap a SARFAESI notice and the accountability tag vanishes. They are, after all, too small to unnerve them. When MFIs were given loans that went bad, nobody questioned them as they formed part of priority sector lending. But these sectors opened up during the first two decades of nationalisation.
Lately introduced MUDRA and PMEGY loans are no different from the yesteryears’ IRDP, SEEUY or PMEGP, either in identification or dispensation. Banks feel that since these are sponsored and guaranteed by the CGTMSE, winking at defaults or rising NPAs is no big cause for worry.
But corporate bad loans rose to 21.9% by end of March 2018. Law applies after procrastination, cases take long even to register. In the UK, Europe and the US, economic offenders are brought to book swiftly and charge sheets are filed in good time. In India, even to declare a fugitive offender with ample evidence takes months. Tracing/tracking economic offence is interfered with by politically influential persons.
The why of this situation has been discussed in all financial dailies: credit discipline suffered, credit risk not assessed properly, complicity in lending, government silently lent support to corporate chiefs who turned wilful defaulters, collapse of governance in banks, etc. Litigation is expensive for small borrowers and evasive for large ones. IBC has come too late, and with not much to offer to banks. Things have come to such ridicule that even a small borrower raises voice to a banker when either discipline is imposed or guarantee is asked for, “After all, you give to Mallyas and Niravs thousands of crores of rupees, and when it comes to us, you choose to harass us”. Moral hazard is staring the sector.
It’s time to recall the first decade of nationalisation when banks moved with institutional innovations like agricultural & rural development branches, special officers, rural development officers, regulator moving with lead bank concept to ensure swift expansion of bank branches, etc. The decade saw 54 committees chaired by industry wizards: RG Saraiya, PL Tandon, RK Talwar, DR Gadgil, RK Hazari, B Sivaraman, to name a few. The second decade saw setting up of NABARD. The third saw big-ticket reforms leading to privatisation of banks that saw the birth of institutions like ICICI Bank and HDFC Bank. This decade sowed the seeds of universal banking and closing down DFIs, and saw the birth of SIDBI.
The Narasimham Committee led to clean-up of bank balance sheets. The regulator introduced IRAC norms. The fourth decade following the world’s greatest recession led to tightening Basel norms of risk management. Provisions for various asset classifications were enhanced.
The fifth is a decaying decade with ever-increasing NPAs, frauds, malfeasance, even in the wake of CDR, S4A, AQR from RBI. Unable to see the distinction between cause and effect, the regulator is nervous. Banks are afraid of extending credit to industry; CMIE data shows while industry credit declined (22% in 2012 to 16% in 2018), retail lending surged from 9% to 11.4%. Investment-to-GDP ratio declined during the same period, from 34.3% to 30-31%. FDIs during the last one year are looking southwards, weary of the credit climate.
RBI and the government should concentrate on bolstering the image of banking. All bank boards must be revamped in no less than three months; RBI should get out of boards; hasten resolution process for bad debts; bar banks from sale of third-party products; revive DFIs; incentivise banks that do banking, keep investigations under wraps until results are out; and improve currency management and legislate against loan write-offs with taxpayers’ money.
B Yerram Raju is a Former senior banker and currently adviser, Government of Telangana, on TIHCL. Views are personal.