Millennium Post

Precarious banking system

Present banking crisis is due to the corporations who have borrowed from the banks disproportionately by resorting to lapses in the system

The Indian banking sector is in deep crisis. The banking system has had no direct exposure to the subprime mortgage assets or failed institutions. It has very limited off-balance sheet exposure. Secondly, India's growth is driven predominantly by domestic consumptions and domestic investments.

However, with the advent of globalisation, India's two-way trade i.e., trade globalisation and financial integration with the world which includes Indian corporate sectors' access to external funding, has been hit by the crisis. Despite not being fully globalised, India has been affected due to external shocks and domestic vulnerabilities.

The Indian Financial system largely escaped unhurt from the 2008 global crisis with the intervention from a regulator i.e., RBI but it is difficult to ascertain precisely. It is likely that a sizeable portion of today's huge NPA can be traced back to the projects undertaken before 2013 when a false sense of security was being given that Indian economy and finance is immune to global shocks.

On this background, present data on NPA:

2000 to 2010, growth in NPA was minus 6.20 per cent while 2010 to 2015 it was plus 365 per cent and in 2015 to 2018 it was plus 221 per cent. 2009-10 to 2017-18, the addition in NPA is 18,84,507 crore. 2009 to 2018, banks have provided 8,80,277 crore towards NPA out of profits.

2010 to 2018, banks have written off bad debts amounting to Rs 4,23,428 crore. Present figure of NPA Rs. 8,42,291 crore is excluding figure of write off. In the top 12 NPA accounts, the amount involved is Rs 2,53,729 crore which is more than 25 per cent of total NPA.

This revelation of NPA largely came to the surface only after Asset Quality Inspection by RBI at the instance of the then Governor of RBI Raghuram Rajan. It is not an overnight addition in NPA, which till this time was suppressed by resorting to policy prescription, provided by the same regulator - RBI, such as Corporate Debt Restructuring which commenced in 2001 and Strategic Debt Restructuring which commenced in the year 2015.

Development Financial Institutions like ICICI and IDBI were converted into commercial banks consequently upon which corporate was left with no other choice than to approach the commercial banks for their long-term funding need for infrastructure and core sector projects, more particularly because of the credit crunch in the global market due to Global Financial Crisis. Thus, it can be fairly concluded that the present crisis in Indian banking has its roots in the Global Financial Crisis and this is precisely the impact of the crisis on the Indian banking system.

This impact is not only circumscribed to NPA. Indian banking is passing through one of the worst crisis in history. Since the last three years, banking in the public sector is almost stagnant.

Of 21 public sector banks, only two banks are showing profits. With the continued losses, capital of those banks is eroded. Thanks to the Central government with whose support those banks are surviving. It can be perceived that the overall situation in Indian banking more or less is similar to the US in 2008. As stated in the Financial Stability Report by RBI, of total credit in the corporate shares of 55 per cent, 86 per cent is NPA. This indicates that present crisis in banking is due to the corporations who have borrowed from the banks disproportionately by resorting to lapses in the system and also to so-called imaginative and innovative financial instruments, products and services.

While big bang financial sector reforms could not be pursued mainly because of the opposition from left parties and Trade Unions, incremental liberalisation and integration with the global financial markets continued in India. The reason why India has not witnessed financial crisis as was witnessed in the US or elsewhere is mainly because the Indian financial system is far more regulated and the public sector dominates the market.

However, policymakers in India are consistently pursuing to follow the path of liberalisation, privatisation and globalisation in all spheres of the economy including finance and banking. The present crisis erupted in IL & FS is the live example wherein ultimately the government was forced to intervene and postpone the crisis. Maybe this crisis will precipitate in NBFC and Mutual funds and possibly, with this, the entire financial sector once again may have to pass through rough weather.

The Indian economy is more connected with the global financial system today than it was a decade before. The exposure to FII has increased drastically which tends to be volatile making the economy more vulnerable to any external shocks.

There is a trust among the people in the country about the strength of the banking system mainly because public sector banking dominates the scene. Thus, despite the majority of those having booked the losses, the public continues to have faith in them.

It is the public sector character which matters and not their capital or compliances with BASEL or otherwise. Now present political dispensation at the Centre is taking position contrarily and is initiating the discourse in favour of privatisation instead of recovering huge NPA. It is to strengthen banking which may prove to be disastrous.

(The author is Joint Secretary of All India Bank Employee Association. The views expressed are strictly personal)

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