MillenniumPost
Opinion

Professionalism in banking sector

Resolving NPA crisis must be a priority as banks are pivotal to economic changes

Shakespeare's line "neither a borrower nor a lender be, for loan oft loses both itself and friend," may sound cynical, but surely serve as a heads-up for the banking industry which is hit by the accumulation of non-performing assets, especially against long-term loans to the corporate sector. Between 2005-06 and 20016-17, NPAs in scheduled commercial banks and PSBs have registered a threefold increase from 3.3 to 9.6, and 3.7 to 11.7 per cent respectively. When foreign banks in India had a rise of less than 2 per cent, the old private sector banks reduced NPAs from 4.4 to 1.9 per cent during the same period. Interestingly, when loans to corporate sector amounted to 37 per cent of total credit, they also account for a lion's share of NPAs i.e., 73 per cent. By the end of 2017, the gross NPAs of all the banks amounted to Rs 8,40,958 crore in absolute numbers which is equivalent to annual budgets of a few state governments. A developing economy can ill-afford to squander the financial resources of such a huge magnitude.

NPAs against loans will erode the capital base of the banks and create a credit crunch. Asset-liability mismatch in banks i.e., advances being disproportionately higher than the deposits, is a prime consequence of NPAs which adversely affects depositor's trust and leads to withdrawal of deposits in the long run. Such an eventuality would lead to a low rate of advances at high rates of interest discouraging entrepreneurship. It appears that in the race for quick profits professionalism gave in to ambition, compromising larger concerns of the economy. Banks do not seem to have learnt lessons from the economic meltdown of 2008 in the US and the west which largely was a result of 'mispricing' of loans and reliance on dubious assets in search of high profits with low risk.

Asset-Liability mismatch in banks poses a clear and present danger not only to the credibility of institutions but also to the 'ecosystem' of economic activity in a given society. This is primarily due to liberal but selective credit practices with heavy dependence of credit rating agencies just as it happened in the US during 'subprime loan' crisis where liabilities were projected as assets with sugar-coated terms like Collateralised Debt Obligations (CDOs) and Mortgage-backed securities. Banks in India do not possess their own independent agencies to evaluate collaterals nor do they take pains to ascertain the credibility of a borrower firm. Granted, long-term loans were advanced to suspicious entities, however, banks do not shadow them in order to ensure that the money is not misused. Alarm bells sound and the whole system wakes up only when borrowers default and collaterals turn into NPAs. What follows next is only a matter of media interest with the law taking its own course, which is not as much to recover the debt as it is to book the defaulters. Enactment of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, and the Insolvency and Bankruptcy Code (IBC) 2016 could help the recovery of debts by the liquidation of collaterals. Nevertheless, liquidation only means handling bad debt and as such it doesn't guarantee complete recovery. A system of structured sharing of credit information and follow-up action among banks in pre-empting frauds was recommended by Moily Committee.

However, it is time banks began introspection. Banking is not business in money per se. It's a motor force for growth. Efficient management of public deposits and ensuring of a sound credit system is a sine qua non for the growth of a nation. Banks should have a professional approach to business in place of bureaucratisation. Though financing mega projects are unavoidable in view of larger concerns of economy, banks should not ignore the 'yield curve' in terms of long-term and short-term projections against loans. Strengthening capital base through diversification of operations in reliable fields can offset losses and helps sustain the business. Agriculture, food processing, services and retail sectors have the potential for increasing production and employment opportunities. With limited risk and quick repayments in these areas, banks can build up capital and also ensure more credit at competitive rates.

Since the late nineties, growth in the economy has been influenced by increasing domestic consumption and demand for household and consumer loans has been on the rise. Unlike many advanced economies which depend primarily on exports, India has the advantage of a huge domestic market which can almost entirely consume goods and services produced within the country. The Finance Ministry has also directed smaller PSBs to reduce corporate lending and focus more on the retail sector including agriculture. NPAs in retail and agriculture sector are only 3.71 and 8.89 per cent respectively against the total credit and the repayment track record is remarkably better in comparison to the corporate sector. However, retail credit in India is less than 12 per cent of GDP in comparison to 36 per cent in emerging economies and 72 per cent in developed economies. Retail sector loans are demand-driven which in turn help production firms to expand. Agriculture and food processing are promising areas for banking. NITI Aayog's agenda 2022, inter alia, emphasises on converting farmers into 'agripreneurs' through e-NAM which implies a need for expansion of agricultural credit. The amount of flexibility and readiness seen in corporate lending is conspicuously absent in the retail sector and agriculture. On the contrary, the disposition of banks towards the latter is often characterised by red tape; a perfect 'penny wise-pound foolish' mindset.

The working age population in India is expected to be 64 per cent by 2021 with a majority between 20 to 35 year age unlike anywhere in the world. It means productive manpower, wages, consumption and savings which are rudimentary for the health of an economy. There is a need to engage with them as part of the growth agenda. But banks are unenthusiastic with regard to 'financial inclusion' except when it is mandatory under the government schemes. Even then, the involvement is often perfunctory. Reaching out to migrant labourers, small and marginal farmers, street vendors, self-employed professionals and small entrepreneurs et al, means more and stable deposits and strong customer base.

Banks have a pivotal role in bringing about economic change in a country. Banks cannot afford to function as silos. They need to prioritise their agenda in tune with the developmental needs of the nation as spelt out by the government. Poverty alleviation, employment generation and infrastructure development, inter alia, are priorities which depend on the sound banking system and stable credit market.

(The author is a senior bureaucrat of Chhattisgarh. The views expressed are strictly personal)

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