- The concept of Credit
- Way Forward
- Positive Trends
Bank and the COVID pain
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Following COVID-19, Reserve Bank of India had announced a moratorium in March 2020, on the repayment of all term loans for both businesses and households, to ease their burden during the lockdown. Initially allowed for three months, it was later extended till the end of August 2020.
The concept of Credit:
- Credit is not a gift or a subsidy and it has to be repaid.
- Otherwise any credit expansion, no matter how worthy the recipient or cause, will only waste scarce national resources that a country cannot afford.
- A modern economy grows by lending and a modern state is a welfare state.
- But COVID has created unreasonable requests like interest waivers, endless moratorium extensions, blanket one-time restructurings, fudging accounting, reducing capital adequacy, 24-month IBC suspension, etc.
- COVID creates deep pain but we must resist consistently choosing borrowers and persist with the multi-year five-pillar strategy to sustainably raise our Credit to GDP ratio from 50% to 100%.
- As per RBI’s latest financial stability report at the end of April 2020 around half of the customers of scheduled commercial banks, accounting for half of the outstanding bank loans opted to avail the relief measures.
- According to RBI’s estimates, banks’ gross NPAs may rise to 12.5 % by March 2021, up from 8.5 % in March 2020, if the economy contracts by 4.4 % this year.
- However, if contraction worsens to 8.9 %, bad loans could rise to 14.7 %.
- Public sector banks are likely to witness a larger rise in bad loans than their private sector counterparts.
- The government banks need more than capital as their risk-weighted assets are lower than two years ago despite a Rs 2 lakh crore capital infusion.
- Owing to its fiscal constraints, the government is unlikely to recapitalise banks to the extent required.
India needs to patiently balance financial inclusion and stability by persisting with the five-pillar strategy given below:
1. Bank competition:
- India had 82 banks in 1924, 97 in 1947, and has 95 scheduled commercial banks today.
- Socialism is essentially capitalism without competition — the lack of capital in banks represents the zero-sum mentality of socialism.
- Raising credit availability and lowering its price needs competition-driven innovation.
2. Private bank governance:
- Private banks are only 30 % of deposits but 80 % of bank market capitalisation, 77 % of incremental deposits, and 77 % incremental loans.
- Recent accidents suggest problems with public shareholder collective action and the attention, skill, and courage of board directors.
3. Government bank governance:
- Over 10 years, government companies have sunk from 30% of India’s market capitalisation to 6%.
- Government banks mirror this decline — their 70 % bank deposit share translates to only 20 % bank market capitalisation share.
- Many have irrational employee costs to market capitalisation ratios.
- We need only a few government banks with strong governance and no tax access for capital.
4. RBI’s regulation and supervision:
- Recent accidents in financial institutions reinforce the importance of statutory auditors, ethical conduct, shareholder self-interest, and risk management.
- Zero failure is impossible, but the RBI should boldly re-imagine its current mandate, structure and technology.
5. Non-bank regulatory space:
- Regulatory apartheid traditionally existed between banks and non-banks.
- But progress in payments, MSME lending, and consumer credit suggest that non-banks are important for financial inclusion.
- They need more regulatory space and supervision.
- There are some positive signs in the economy and banking infrastructure.
- Forex reserves of the country are at an all-time high.
- The interest rates of banks are low and the Borrower rate transmission is improving.
- India has reached the target of a billion digital mobile payments a month and replaced by a new target of a billion payments a day.
- Bank and NBFC accidents have seen orderly resolution.
- RBI has an internal committee to review bank licensing and capital norms and the bank’s governance note is open for comments
- The RBI is raising its supervisory technology investments and revamping early warning models.
- It is finalising an ambitious five-year vision for HR and technology.
- Deposit insurance limits have been raised with a risk-based premium framework proposed.
- RBI has proposed licensing competitors to the NPCI and calibrating an exit strategy for emergency COVID measures.
Failure to address the underlying weakness in the financial system, while at the same time asking banks to ramp up (increase) lending, despite their unwillingness to take on credit risk, could further adversely affect their balance sheets. This weakness in the financial sector could slow down economic recovery. The Banking system needs a regulatory overhaul and restructuring to the core to stand tall in the present times.