Budget 2021

Awaiting reforms, investment boost

Radhika Merwin BL Research Bureau | Updated on January 23, 2020

Big govt spending to perk up investments vital to revive lending


It was a turbulent five-year period for the banking sector under the BJP-led government’s first term. Galloping bad loans, plummeting credit growth, rising bank frauds and governance issues plagued the sector and in turn hurt the economy. While it is true that the genesis of the bad loan saga lies in the excessive lending between 2009 and 2013 (pre-Modi era), the sharp slowdown in the economy, lack of much-needed governance reforms at PSBs, inability to address capital issues of PSBs, and adhoc shotgun weddings (mergers of PSU banks) accentuated the pain for the banking sector.

A rough ride

When the Modi government came into power in 2014, high inflation, slowing credit growth and rising bad loans were pegged as key issues plaguing the sector then. But for the significant fall in inflation (until recently), that has helped ease interest rates, the issue of falling loan growth and increasing delinquencies have only worsened over the past five years.

Coincidently, a year after the Modi government took charge, the RBI went on a massive clean-up drive with its asset quality review in 2015. This was followed by sharp divergences revealed in the RBI’s annual risk-based assessments.

What deepened the sector’s woes was the break-out of the IL&FS and DHFL crisis over a year ago. The spill-over effect of the NBFC crisis and heightened stress in a few corporate groups took a further toll on banks’ asset quality. The worsening slowdown over the past six months has only exacerbated the situation. While optically, growth in bad loans has fallen considerably in the first half of the fiscal, it has been on account of a high base (bad loans had galloped last year). Bank credit growth which had climbed to 12 per cent in March 2019, has slipped to 7-odd per cent as of December.


Weak attempts

During this tumultuous period, the government, on its part, did undertake several reforms and measures. But these have achieved little success.

Take for instance the constitution of an independent Bank Boards Bureau (BBB) as proposed in the 2015-16 Budget. While the BBB was to usher in an independent selection process for top bank officials, it proved a damp squib.

While the government did start the process of diluting its stake with IDBI Bank as a test case, the persisting weak state of affairs at the LIC-owned bank (51 per cent LIC, 47 per cent government), and the government still having to pump in capital (infused ₹4,557 crore in the September 2019 quarter) throw up concerns over the manner in which such moves have been executed (nudging LIC to play the knight in shining armour).

On the consolidation front, the Centre did cover much ground, by merging Bank of Baroda with Vijaya Bank and Dena Bank and also set off four other mergers —folding 10 PSBs into four. But the good news ends there. Bank of Baroda, after the merger with Vijaya and Dena Bank, continues to witness pressure on profitability and asset quality. The other four mergers that are underway — Oriental Bank of Commerce and United Bank with Punjab National Bank, Corporation Bank and Andhra Bank with Union Bank, Syndicate Bank into Canara Bank and Allahabad Bank with Indian Bank — lend little comfort.

The Centre may only need to infuse more capital into these mammoth institutions, many of which may get categorised as Domestic Systemically Important Banks (DSIBs) or ‘too big to fail’ banks.

The Insolvency and Bankruptcy Code (IBC) implemented over three years ago has failed to deliver quick resolution, hurting banks. Despite a slew of amendments, judicial overreach and delays are still key roadblocks.

With the Centre doing away with the suspense on recapitalisation, the wish-list of bankers appear to revolve around setting up of a ‘bad bank’, extension of restructuring of MSME loans, interest subvention scheme for investment credit for agriculture infrastructure, and streamlining certain operational issues under GST. Above all, bankers are pinning their hopes on the Budget to restore the lost trust in the financial system. Leeway on principal repayments of certain NBFCs/HFCs and extension of the partial credit guarantee scheme beyond June 30, 2020, for purchase of high-rated pooled assets of NBFCs/HFCs, are expected to help address the sector’s issues.

MSME loan rejig

In January last year, the RBI had allowed a one-time restructuring of existing loans to MSMEs. This was subsequently extended to March 31, 2020. Bankers are hoping for this dispensation to be extended for another year.

While the idea of quarantining stressed accounts into a Public Sector Asset Rehabilitation Agency (PARA) floated in the Economic Survey 2016-17, is once again gaining traction, the existing ARC (28 asset reconstruction companies) sector is instead hoping for further reforms to ease up capital flow into the sector.

Structural reforms and big government spending that can kick-start investments will be imperative, to revive bank lending. But more importantly prepping PSU banks for the next leg of lending will be critical. And hence the Centre will need to kick off governance and ownership reforms at PSBs in the upcoming Budget. After all steering the mammoth entities created after the mergers, would require greater board autonomy and strong leaders at the helm.

Published on January 23, 2020

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