Twenty years ago, the Indian banking system was in a crisis. Reform of public sector banks was the cornerstone of the economic reforms that were unveiled then. The government and the RBI had just introduced new norms for income recognition, provisioning and capital adequacy for Indian banks in line with international norms. It was a reality check for banks and they failed it badly.

Till then they had been run in a manner completely at variance with sound prudential norms. The focus was only on increasing deposits and advances with little attention paid to recovery of loans or to profits.

Antiquated and opaque systems and accounting practices ensured that the problems remained well hidden and made correct evaluation and proper supervision almost impossible. The level of defaults facing the bank was high. Net non-performing assets were at a level of 14.5 per cent in 1994. (As an aside, today when the same figure is at 3-4 per cent, we raise a hue and cry!)

The then finance minister Manmohan Singh said in his 1993-94 budget speech that over Rs 10,000 crore would have to be set aside as provision for bad and doubtful debts of banks.

While this large sum would erode banks’ capital, he promised that the government would infuse about Rs 5,700 crore to meet capital adequacy requirements. However, he made it clear that this would only meet immediate requirements and that the exchequer would not be able to bear the full burden in the coming years. The government, therefore, decided to allow State Bank of India and other nationalised banks to access capital markets to meet the shortfall in their capital requirements.

Within the next year, SBI had managed to raise Rs 2,200 crore through equity and Rs 1,000 crore through bond markets. Over the next couple of years, others too joined the fray and today all Government-owned banks have gone public. During the course of the next decade, the government infused almost Rs 23,000 crore into various public sector banks as capital.

In 2006, banks had reached a stage of relative strength that allowed the then Finance Minister P. Chidambaram to say that we had now reached a stage where those special recapitalisation arrangements could be unwound.

A combination of circumstances (his debt waiver for farmers in 2008, the global crisis that began in that year and the new advanced norms of capital adequacy required) have ensured that governments will continue to recapitalise banks now and for some time in the future.

In 2010-11, government provided Rs 20,157 crore and about Rs 6,000 crore in the last fiscal. In the coming five years, government will have to make more allocations for infusing capital into public sector banks. According to the RBI, government may have to infuse almost Rs 90,000 crore as equity to meet the Basel-3 requirements.

In the 1993-94 Budget, there was one other item that was of great interest and relief to bankers and corporates. This was the removal of the dual exchange rate that prevailed for a year. Till then, exporters would have to surrender 40 per cent of their export earnings at the official exchange rate and get market rates for only 60 per cent of their export earnings. This obviously led to leakages and the government was persuaded on the wisdom of having a single rate. For the next few years budget announcements pertaining to the banking sector were routine. There was of course the usual concern expressed about rising NPAs and the measures contemplated to address them. These included over the last two decades, steps to strengthen the Debt Recovery Tribunal to expedite cases, then the setting up of more Debt Recovery Appellate Tribunals, setting up asset reconstruction companies and the like.

In 2001, the then Finance Minister Yashwant Sinha proposed to bring a legislation for foreclosure and enforcement of securities (SARFAESI). He also announced the abolition of Banking Service Recruitment Boards to allow banks the freedom to take care of their recruitment on their own.

Some ideas proposed in the budgets of those years fell by the wayside, sometimes because they were no longer relevant as circumstances changed, and sometimes because governments changed.

For instance,Yashwant Sinha proposed in the 2000-01 budget, the constitution of a Financial Restructuring Authority to tackle the problem of weak public sector banks. He also said that the statute would be amended to allow supercession of the board of directors of such weak banks by this authority.

Around the time this idea was floated, there were even rumours that these weak banks would be merged or closed. That didn’t happen. Instead, these weak banks managed a turnaround aided by some generous government recapitalisation and falling interest rates.

Three of them that were once in a precarious state ( UCO Bank, United Bank of India and Indian Bank) have since managed to go public and have put the past behind. And the idea of a financial restructuring authority died a quiet death. In that same year, Sinha also announced that the government had decided to reduce the requirement of minimum shareholding of government in public sector banks to 33 per cent, ‘without changing their public sector character’.

This idea too fell by the wayside with the change in government. The minimum shareholding limit for government in public sector banks continues to be at 51 per cent.

Finance ministers need patience too, when they deal with banks and banking matters. They may propose, but it is for the almighty and a number of other agencies to dispose.

Ask Pranab Mukherjee. He proposed further opening up of the banking sector and issue of new licences three years ago. The RBI has just issued final guidelines on the subject.

From here to eventual issue of a licence and starting of operations may still be a year away. There you have it - from proposal to execution is an arduous four-year process. This in a milieu where governments (or at the least finance ministers) don’t seem like they will survive that long in future.

vageesh.ns@thehindu.co.in

(This article was published on February 27, 2013)
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