Modi 1.0: Banks empowered in a big way, but bankers have a rough time

Public sector banks' board structure continues to remain like before, despite the govt drawing up plans to initiate substantive reforms in the space

The five years of the National Democratic Alliance (NDA) government witnessed a growth of private sector banks, while public sector banks remained risk-averse and circumspect in expanding their business because of fear of more bad debt. 

Analysts are generally positive about the fate of the banking system under the present government, but they also say that the regime started with great plans that was never really followed through in full. 

To credit the government, it did stand firmly behind the Reserve Bank of India (RBI) in its fight against the banking system bad debt. The government showed political will in walking the talk on bank mergers and sold its stake in IDBI Bank, ceding control. It also provided capital support to the ailing banks, even as the strict conditions imposed initially were watered down substantially later on. 

The government assured capital won’t be a problem where needed, encouraged lateral entry in bank chief positions, and introduced such powerful laws as Insolvency and Bankruptcy Code (IBC), which was a game changer for the banking industry. Pradhan Mantri Jan Dhan Yojana (PMJDY), which enabled every family to have a bank account, and thus included in financial fold, was a major achievement. The government also made digital banking more mainstream. 

Analysts and bankers also agree that political and bureaucratic interference in banks’ loan sanctioning matters were largely absent, if not eliminated from the core. 

But the five years also saw demonetisation of 86 per cent of banking system cash, departure of two Reserve Bank of India governors, ballooning bad debts due to sharper recognition of hidden bad debts. 

However, other important reforms such as bank board bureau (BBB), which was supposed to morph into something big and different altogether, such as a bank holding company, vanished from the political discourse somewhere mid-way, say analysts.

Public sector banks’ board structure continues to remain like before, despite the government drawing up plans to initiate substantive reforms in the space. The public sector banks continued to remain homogenous entities with virtually no concept of merit-based reward system.

“This government could have done much more. When Prime Minister attended the first Gyan Sangam in Pune (in 2015), it built up a major expectation. Somewhere the narrative was lost,” said a banking analyst requesting anonymity.

“The government deserves credit for the IBC, which completely changed the banking landscape. Also, it showed the courage to clean up bank balance sheet, which could have been a political risk.  But the recpaitalisation should have been done at the very beginning, without attaching any condition. What it could do with IDBI Bank may not be done with other public sector banks and of course, there has been virtually no governance reforms in PSBs,” said the analyst.

The government also invoked the never before used Section 7 of the RBI Act, which compels the central bank governor to toe the line of the centre, invoking major controversy and perhaps causing the exit of RBI governor Urjit Patel.

The government supported the Reserve Bank of India (RBI) in forcing banks to disclose the stressed loans through an asset quality review (AQR).

Public sector banks’ gross non-performing assets (NPA) increased from Rs 2.14 trillion in June 2014 to Rs 7.78 trillion at the end of December 2018. In the same period, listed private sector banks’ NPAs rose from Rs 37,691 crore to Rs 1.88 trillion. At the end of September quarter, stress due to wilful defaulters’, stood at Rs 1.47 trillion.

Reserve Bank of India’s stress test shows that the asset quality of Indian banks will improve in March this year. The gross non-performing assets ratio (GNPA) of all banks may come down from 10.8 per cent in September 2018 to 10.3 per cent by March 2019. This could further fall to 10.2 per cent in September, said the RBI’s Financial Stability Report for December. It is also a relief for the economy that NPAs started falling for the first time in three years since 2015.

Between June 2014 and December 2018, public sector banks’ market capitalization rose marginally from Rs 4.39 trillion to Rs 4.64 trillion. However, for private sector banks, in the same period, market capitalization rose from Rs 6.41 trillion to Rs 15.67 trillion.

By the end of December quarter, public sector banks’ deposit growth rate was 4.9 per cent, and credit growth was at 8.4 per cent. Private sector banks’ credit growth rate at the end of December was at 22 per cent, while deposits grew at 20 per cent.

The government announced recapitalisation of Rs 2.11 trillion in October 2017. The government had infused Rs 88,139 crore in PSBs during financial year 2017-18 and made a provision of Rs 65,000 for the current financial year. Till November 2018, PSBs have been recapitalised to the tune of Rs 1.29 trillion through infusion and mobilisation of capital from the market, according to a reply by Minister of State for Finance in the Parliament.

Bankers had a rough time under Modi as they witnessed intense gaze on their activities by investigative agencies that harassed and arrested bankers for past business decisions gone wrong. A massive Rs 13,000 crore plus fraud by celebrated jewelers seriously dented Indian banking system’s prestige and bankers were generally ostracized by the society at large, and even harassed by police and agencies.

Bankers and analysts agree that the IBC and also the so-called Feb-12 circular of RBI have been a game changer for the banking industry. The February 12 circular ensures that the moment when a loan becomes default, banks initiate steps to recover the loan and if needed can sell the company to recover their dues. “We have IBC, we have 12 February RBI circular, which is stronger than IBC,” said State Bank of India chairman Rajnish Kumar in Business Standard’s annual banking roundtable in December. Top bankers that time said recovery has doubled after IBC.

RBI data showed that for the 701 cases admitted under the National Company Law Tribunals (NCLT), and claims admitted on 21 accounts for an amount of Rs 99 billion, the recovery has been Rs 49 billion, indicating a haircut of about 50 per cent.