Missing in action: Banking reforms

The difficult gets done at once; the impossible takes a little longer. This is the sort of can-do attitude that everyone – industry, the regulator and the Centre – has been expecting from banks, despite the plethora of challenges they have been up against. In the last three to four years, a prolonged slowdown has impacted the investment cycle and taken its toll on bank lending. The staggering pace at which bad loans have been increasing – clearly a result of excessive lending in the past – has worsened the situation.

Bank credit, which grew at 2.5 to 3 times the real GDP growth, has slipped to 1-1.5 times in the past four years. The gross non-performing assets as a per cent of loans have only increased from 9.6 per cent to 10.2 per cent between March and September 2017. Hence, nothing much changed for the banking sector in the past year since the last Budget.

There has, however, been one silver lining to count. The Insolvency and Bankruptcy Code (IBC) is a giant leap forward from the earlier regimes, seeking quicker and more efficient resolution of stressed assets. But the large number of accounts under IBC have also led to elevated provisioning, further weakening the capital positioning of PSBs in particular.

Against this backdrop, the sector’s expectations from the Centre this year were not difficult to hard-guess – sizeable capital infusion and tax concessions on bad loan provisioning.

What next?

By announcing its mega bank recap plan of ₹2.1 lakh crore sometime back, the Centre had let the cat out of the bag on its capital infusion agenda. Very recently, it also announced the manner in which it planned to apportion ₹80,000 crore of capital between 20 public sector banks. So then, what was keenly awaited in the Budget?

Given that 11 banks under the RBI’s corrective action have got 46 per cent higher capital than other PSBs, expectations ran high on a clear roadmap to jump-start banking reforms in the sector. While the Centre has laid down several reform measures that banks need to undertake, it was unclear on how these could be implemented without a complete re-haul of the governance structure. The Budget, sadly, yet again failed to set out a clear roadmap for granting more autonomy to bank boards, consolidation within the sector, or the Centre reducing its stake in PSU banks.

Agri lending

Given the Centre’s increased focus on reviving agriculture growth within the economy, raising the agriculture lending target to ₹11 lakh crore in the Budget from the already record level of ₹10 lakh crore set last year, was only expected. Much of the credit flow into agriculture in the past has been propelled by policy thrust, particularly through priority sector lending (PSL) stipulations. The Centre’s interest subvention scheme has also been running for a decade under which banks extend short-term crop loans of up to ₹3 lakh to farmers at a concessional rate of 7 per cent. Timely repayment is incentivised by an additional subvention of 3 per cent.

Outstanding bank advances to agriculture and allied activities have risen from about 13 per cent of GDP originating in agriculture and allied activities in 2000-01 to around 53 per cent in 2016-17.

But there are several weak links to the sizeable flow of credit to agriculture.

For one, the government’s interest subvention for short-term crop loans, hasn’t helped in prompt repayment. On the contrary, NPAs in agriculture loans have been rising sharply over the years.

From about 2.5 per cent some five years back, it is now a little over 5 per cent. The amount of NPAs have continued to rise – from around ₹10,500 crore in 2009-10 to ₹60,200 crore in 2016-17.

Bankers say that most of the farmers have become overleveraged over a period of time due to restructuring and doling out of additional funding. Hence, just as in corporate accounts, here too, the debt has to be split into sustainable and non-sustainable portions. As a one-time exercise, the unsustainable portion has to be written off, say industry players.

Notwithstanding this, the Centre has been doling out subsidy for such loans. In fact, the subsidy payout under the interest subvention scheme has gone up over nine times since 2009-10. This year, the allocation has been set at ₹15,000 crore.

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