Beyond NPAs and PNB Scam : Will the Ailing Public Sector Banks Recover?
The crisis in current banking sector didn’t happen overnight.
Public Sector Banks (PSBs) have a dominant stake (i.e. more than 50%) held by a government. It accounts for 70% of Indian Banking and Financial systems. There are a total of 21 PSBs in India. Presence of Nationalized Banks in India continued to grow in 1980s. Most of their shares are listed on stock exchanges. Their branch network penetrated even in rural and semi-urban areas. They also executed various schemes of the government to mobilize deposits of the poor. It catered to rural economy and played vital role in nation building.
Critically speaking, most of these banks were more subject to political interference and used by them for populist measures. Currently they are overburdened with NPAs (Non Performing Assets) which is divided into two broad categories. Genuine defaulters (due to loss in business) and other willful offenders. Growing severity of NPAs in most of these banks has since evolved in increasing trend. It’s a pity that since decades, many schemes of the government failed to stop these law breakers from looting public money. And today these scamsters seem to have perfected the art of ‘Loot and Scoot’. They are foresighted and escape through the loopholes to foreign countries and cool their heals with taxpayers money. The mounting overhang of bad loans in most PSBs got worsened to huge extent by March 2014. Its hue and cry sending strong signals to Modi government who came to power in May 2014, promising ‘Ache Din’ for the banking sector. The steps undertaken by them did not guarantee the return back of money taken by big corporates. The enormity of NPA mess ballooned in 2016 giving sleepless nights to government and RBI. Modi government alleged and accused NPA scam’s legacy on the congress. Though their reform momentum had begun but a major NPA revival is yet to happen.
According to RBI’s data the gross NPAs had turned worse in Modi’s regime. Increasing stock of bad loans with a huge capital void still continues to be a major challenge for Modi government. The total chunk of bad loans and NPAs in the banking sector is around 8-9 lakh crore and the rot runs deep. In Oct 2017, government announced Recapitalization of PSBs of Rs. 2.11 lakh crore for instant relief. The union budget set a clear road map for capital infusion helping PSBs to some extent to mitigate risks.
In a bid to tighten NPA rules and hasten the act on defaulters, RBI set new norms for bad loans. Its revised framework on Feb 13, 2018 to monitor resolution of NPAs and subsume CDR, SDR, S4R is commendable. Thus developing an ecosystem with greater transparency, efficiency and credibility. Clear cut policy guidelines required as cleanup operation of NPAs is robust. It will help in sanitizing the banking sector.
Apart from NPAs, PSBs are plagued by various scams which is multiplying the crisis. The recent PNB scam of $1.8 bn being the country’s biggest banking fraud ever. Followed by new scam unfolding to the tune of 389.85 crore with OBC. India’s state owned banks have, once again, astoundingly failed to detect frauds with repeated cycle of similar symptoms - Fraudulent LoUs issued goes unnoticed for years, Patchy implementation of CBS and not linked with SWIFT misused by bank employees, Indiscriminate lending to undeserving persons for political gains, Eventual recapitalization wasting tax payers money. These lapses have developed a political economy using the mixed socialist economic model of PSBs. The political class use it to facilitate their anonymous corporate funders through directed credit and loan waivers. This ensures their support and more than enough money for re-elections.
Moving away from politics, there is no accountability at all. There is a clear oversight of government and RBI to effectively detect and prevent frauds. Unchecked for so long – it began around 2008-2011. Time and again, failing to recognize the red flags and keep repeating the problems of the past. Now they are shifting the blame on each other instead of owning the responsibility and correcting the system. Was RBI so busy verifying demonetized notes that it compromised stricter supervision over public and private banks? Letting loose the fraudsters to loot public money and flee abroad. It’s a wakeup call for RBI that its still not too late to bring in more transparency in economic policies, credit policies and NPA norms. They are yet to publish the list of defaulters and tighten the rules for emigration of bank defaulters.
Modi government’s chest-thumping loud anti-corruption slogans have diminished and there is a deafening silence on failure to keep that promise. Government should stop behaving as a business operator and take urgent reforms and steps to plug the loopholes. It is making cautious moves to maintain its credibility and woo the voters, ahead of elections 2019.
In a larger picture, FICCI firmly believes that privatization of PSBs should also be considered. This will reduce continuous pressure on government finances. Recapitalization alone cannot be taken as a permanent solution. Many experts believe that this may not be a right time to moot privatization. The banking sector in India is more politically led. Hence the Nayak committee has recommended to reduce government’s share in PSBs below 50%. This will free the PSB’s independent directors and BBB(Bank Board Bureau) from government interference and thus ending vote bank politics.
Much has been said bashing PSU banks with allegations, speculations and controversies. Even private sector banks are equally greed driven. If disaster strikes, depositors savings would be worst hit. Depositors don’t really have an option. Their expectation of safety has been shaken. it’s a double whammy and are losing on all sides – erosion of their money, higher charges, less interest accrual.
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