Issues associated with banking system in India

With the potential to become 3rd largest banking industry by 2025 according to some reports, India’s banking and financial sector is expanding rapidly. The Indian banking industry is currently worth more than 1 trillion dollars and banks are now expanding fast as the present Central Government wants to spread the tentacles of the banking industry far and wide. During the time of demonetization and COVID pandemic, bank employees worked hard to ease out the problems of the common man but recently there was a strike of the bank union regarding these issues:

  • Adequate compensation for the officers and employees for extra hours they had put in during demonetization
  • Early initiation of the wage revision
  • Adequate recruitments in all cadres
  • Stringent measures to recover bad loans
  • Criminal action against wilful defaulters
  • Steps to ensure accountability of top executives
  • Increase in gratuity limits

 Some Facts:

  • The government of India set up various committees with the task of analyzing the banking sector.
  • Two such expert Committees were set up under the chairmanship of M.Narsimhan, which submitted their recommendations through reports widely known as Narsimhan Committee-I (1991) and Narsimhan Committee-II (1998) reports.
  • These recommendations helped unleash the potential of banking in India.
  • Greater autonomy was proposed for public sector banks.
  • The Committee also recommended for the merger of large Indian banks.
  • NPA had been the single largest cause of irritation of the banking sector of India.
  • During the decades of the 60s and 70s, India nationalized most of its banks, which culminated with the BoP crisis in the Indian economy. India had to airlift gold to IMF to loan money for meeting its financial obligations. This event called into question the previous banking policies of India.

Some issues and possible solutions related to the banking sector in India are :

  • Trade Unions: Many of the trade unions these days are losing relevance or are out of focus as they are unable to connect with the majority of the workforce and their demands or professional managers. There is a lack of consultation among various stakeholders in the banking sector. Like reforms in the banking sector, trade unions are also required to reform and make themselves more relevant to the workers. Participatory trade unions can be there where collaborative efforts are made to deal with issues.
  • Banking Professionals: During the 60s and 70s, India was almost a cash economy. Post demonetization, around 60% of the population has moved towards digital transactions. Earlier, the bank was a critical component but today with the digital mode of transactions, things have become little easier. This is also a reason why physical strikes of this nature are losing relevance. As digitization progresses, perhaps banking professionals will have to reorient themselves to play a different role.
  • Wilful Defaulters: The slowdown in the economy in the last few years led to bad loans or NPAs. According to IMF Report, 36.9% of the total debt in India is at risk and banks have the capacity to absorb only up to 8-9% loss. There are defaulters ho despite having sound financial health do not pay their loans back due to a lack of stringent measures. Some sort of inconvenience should be imposed on wilful defaulters such as they should not be allowed to travel through airlines, public transport, check in to hotels or public places. There should be a fear factor for such defaulters to put a check on them.
  • More Accountability and Transparency in Key Appointments: The functions of the Banks Board Bureau are still not clear. Some of them include selection and appointment of managing directors and CEOs as well as non-executive chairman of PSBs, helping banks develop a robust leadership succession plan for critical positions, advising the government on the formulation and enforcement of a code of conduct and ethics for bank executives, and helping banks develop business strategies and capital raising plan, among others. But it does not have the final say in key appointments.
  • NPAs: After an asset is recognized as NPA, these steps might be taken:
    • Seize the assets pledged by the borrower and sell them
    • Under the Strategic Debt Restructuring Scheme of RBI, the banks may convert their loans into equity, acquire a majority stake in the firm, dislodge the promoters or management and bring in new promoters and management but the problem is SDR scheme in India has not been implemented effectively yet.
    • Banks may restructure loans in a way that borrowers are able to service them such as stretching out the period of payment, or waiving a portion of the loans, or reducing the interest rate on loans, or some combination of these but the outcome of this step is a loss for the banks.
    • Sell the NPA at a discount to an Asset Restructuring Company which again involves a significant loss on loans when the transaction is made but this will help to clean the balance sheets of banks.
    • There is also an idea of the bad bank where the NPAs of public sector banks can be transferred which will manage NPAs in suitable ways and will help PSBs to focus on new business but there are again issues related to this idea. Given the size of PSBs and their NPAs, bad banks will need huge capital. Who should be the stakeholders in this bank is still not clear.
  • Issue of Monetary Transmission: Like reduced profits, this is also an off-shoot of burgeoning NPAs in the system. With the easing of inflation and moderation in inflationary expectations, the RBI reduced the repo rate by 100 basis points between January and September 2015.

However, change in the key policy rate was not reflected in lending rates as banks are not willing to transmit the benefits of a low-interest policy regime due to the low availability of liquidity against the backdrop of high NPAs.

  • Corruption: Scams in the erstwhile Global Trust Bank (GBT) and the Bank of Baroda show how few officials misuse the freedom they granted under the guise of liberalization for their personal benefit. These scams have badly damaged the image of these banks and consequently their profitability.
  • Crisis in Management: Public-sector banks are seeing more employees retire these days. So, younger employees are replacing the elder, more experienced employees. This, however, happens at junior levels. As a result, there would be a virtual vacuum at the middle and senior levels. The absence of middle management could lead to an adverse impact on banks’ decision-making process.