The Big Picture: Bank NPAs: Should banks be more autonomous?
Rising corporate debt and higher default rates have led to a continuous increase in distress loans in the Indian financial system. The situation has worsened in the last 5 years with the stressed asset ratio rising from 7.6% in March 2012 to 11.5% in March 2016. This accumulation of bad loans in the banking sector is not of corporates alone. Poor credit appraisal, collateral based lending, lack of corporate governance and accountability and ambitious credit growth targets led to unwarranted lending by banks. Aiming to clean up stressed balance sheets of the banks by March 2017, the RBI mandated stricter provisioning requirement under asset quality review which led to identification of alleviated NPA levels in the past 12-18 months.
Some industries are genuinely suffering at present due to the market conditions but corruption does play a role in accumulation of NPAs. However, corruption cannot be attributed to banks alone as it is a part of the system. India has a system of political financing which is done covertly off the books by companies without showing the money used to fund political parties and these parties never reveal where they got the money from. The Lack of Bankruptcy code in India and sluggish legal system make it difficult for banks to recover these loans from both corporate and non-corporate. One of the main reasons of rising NPA is the relaxed lending norms especially for corporates when their financial status and credit rating is not analyzed properly. To face competition banks sell unsecured loans which attributes to the level of NPAs.
There is a need for structural changes in the banking system. For far too long, the banking system has been dominated in India by public sector banks. There were some changes by allowing the private players to come in and there is a clear difference in their performance and functioning. It has been around 45 years of nationalization of banks, there is a need to revisit this industry and see how efficiency can be brought in. Without efficiency, public sector banks might rather shrink than expand. Capitalization of banks through private infusion of funds rather than the Government doing this is necessary. Strategic disinvestment in the banking industry people from within the country and outside need to invest here. The biggest strength of India’s public sector banks is that they have a huge distribution network which no private bank has.
Apart from restructuring, it has to be understood that the economy is not doing very well. There will always be some stressed assets particularly in sectors like steel and power industry despite the UDAY Scheme being there. There is a need to address the needs of these sectors separately. Banking system and its counterpart corporate balance sheets both are over burdened by debts. Part of the reason why investment is down and is failing to revive is because of debt due to which firms are not willing to invest. Banks are not healthy enough to look into new lending. Large infrastructure projects should be funded by corporate bonds. Unless there is a decent market for corporate bonds, one will have to rely on banks and if banks decide on credits, there will be some kind of political influence always present. But if there will be too many people like analysts, stakeholders and others taking views on viability of a particular project, the decision making process will become far more transparent.
It is the most appropriate time to infuse the capital because after demonetization, the banks are flushed with the funds and they are also eager to lend this money. But for making fresh advances, the capital adequacy ratio is also required to be taken care of. RBI introduced number of measures in last few years such as tightening the Corporate Debt Restructuring (CDR) mechanism, setting up a Joint Lenders’ Forum, prodding banks to disclose the real picture of bad loans, asking them to increase provisioning for stressed assets and empowering them to take majority control in defaulting companies under the Strategic Debt Restructuring (SDR) scheme.
The economic and social situation in the country in 1969 was quite different from what is prevailing at present. Now, India has moved to a market driven economy post 1991. There is an absolute need to look at various regulations and laws which have to be in line with the current market situation. There has to be a regulator other than Government which is RBI to regulate both the public as well as private sector banks on even grounds. More autonomy is required but not on the context of easing the rules and regulations. Banks are handling public savings. There has to be a mechanism to ensure that people do get a decent return on their savings.
Some level of NPAs will always be there and cannot be completely eliminated. Firms will fail and that is the whole idea underlying entrepreneurship but it should not reach that critical proportion that they constrain the banking system. Banks are a major part of Indian economy and practically all the major financing of projects are being done by them. So there is a need to look after them.