By
Anjan Roy
Finance minister Piyush Goyal’s
exuberance over finally getting a grip on the banks’ bad debts might be a
little too early. While the latest financial stability report of the Reserve
Bank of India showing marginal decline in the non-performing assets (NPA) is a
welcome sign, this is yet too little again. After the absolute volume of gross
bad debts is so huge, cleaning this Augean stable might take a very long time
–maybe, a decade, if we keep persisting at it.
The minister cited data to point a
finger that the humongous bad debts of banks is a contribution from the last
UPA government. He said: “The period of 2008-14 will be remembered as a period
of aggressive credit growth and, as per RBI, the primary reason for spurt in
non-performing loans and stressed assets.” This may be excused as the political
stance of a successor government.
After all, if credit rises, given that
some loans would go bad, the volume of bad debts will rise. What is needed is
to keep it at the absolute minimum. In the same financial and economic
environment, the private sector banks and foreign banks have far lower NPS
portfolio than the public sector ones. Take a look, while the public sector
banks have NPA proportion of close to 15 per cent, the private ones have around
3.5 per cent and foreign banks even lower. How come?
Can this be ascribed to what the
minister has subsequently referred to as “phone banking”? There is no doubting
that the loan decisions of public sector banks were most often influenced by
unprofessional interferences. Instructions from ministers and even political
bosses are not unknown. The government has often used the public secor banks to
push their government agenda thorough captive public sector banks. To cite,
these banks have been asked to extend loans to sugar mills in UP in the run-up
to state elections.
The blame lies in the very assumption
of the political class towards the public sector banks. These institutions are
thought to be owned by the government and therefore their funds are for the
political class to use or, more correctly, misuse. Long back, Janardhana
Poojary, deputy finance minister, had discovered that he could order banks to
distribute money in plenty at events organised for him. These came to be known
as “loan melas” in the days when funding small-time projects under the
so-called “Twenty-point Programme” formulated by Indira Gandhi was considered
the height of ministerial activism.
There were subsequent squandering of
bank funds. Another prime minister, V.P. Singh, had made virtue out of farm
loan waiver. He had promised farm loans waiver, drought or no drought; crop
failure or bumper crop. It has become such an expectation that when Piyush
Goyal announced this government’s intention for farmer income support, the
irate recipients of the retrospective largess were very vocal critics – why not
government grant farm loan waiver.
We have successfully generated a
so-called eco-system where public sector bank funds are meant to be drawn but
never have to be repaid. Be it large borrowers or small farm loans, why bother
to pay back when you reasonably expect that willy-nilly sometime in the future
these would be either condoned through “hair-cuts” or waivers.
At least with the Insolvency and
Bankruptcy Code in position, and being practised, the large corporate borrowers
have been struck with terror. The IBC has put fear of God or the bank-man in
their hearts that if loans are not repaid in time, their companies and assets
will be confiscated. Either pay up or get out.
This consciousness about the need to
repay bank loans or some little reservations among ministers and politicians
that PS banks money is not all theirs have come mainly following the scare
raised by former RBI governor. Raghuram Rajan. Immediately on assuming office,
the most glamorous RBI governor made quick assessment of the bulging burden of
bad debts around the neck of public sector banks. Being a specialist in finance
and familiar with the financial world, he had put his finger on the weakest
point of India’s sprawling banking system.
When over 85 per cent of Indian
banking is attributed to the public sector ones, such a glaring weakness among
them threatens the entire financial system of the country. Dr Rajan had
introduced a series of technical measures to contain this epidemic, some of
which were deeply resented by the present-day government as well.
Take for instance the RBI stipulation
that banks having a certain baggage of bad debts, compared to their own funds,
should not be allowed to expand their credit portfolio. When a large number of
banks were placed under this surveillance watch and their credit growth were
frozen, funds flows had also become restricted. The government, eager to prove
its track record of high growth, felt this was an unnecessary restriction and
wanted these to be eased. The last RBI governor, Urjit Patel, who had taken
charge from Rajan, had refused to budge and it had become one of the points of
contentions between the RBI and the government.
The finance minister had gleefully
announced that three PSBs have been taken off the PCA framework and would now
be free to extend loans. One only hopes that these banks have genuinely
overcome their stringent existence and were again back to normal. Failing that,
these banks would again face the same quandary over again.
Technical checks and balances are the
absolute necessity for keeping our banks safe and the Indian financial system
stable. However, it is not just these preventive watches that are the
foundation of a stable and robust financial system.
The granite on which the Indian
banking system should rest is trust and respect for these institutions. The
owner of public sector banks should think themselves as trustees of the public
money and not just think themselves as their owners. Millions of Indians have
trusted their small life time savings with the public sector banks.
The politicians at the head of the
government of the day should not misuse that trust.
(IPA Service)
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