A
country’s economic growth trajectory is always determined by the stable
operations of its banking system. Since last couple of years, India’s banking
structures are strained with rising rate of non-performing assets, issues related
to governance, and heightened cases of fraud and negligence. This post attempts
to trace the crisis faced by the banks right from its origins to the current
times.
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n order to peel the layers beneath the prevailing
banking crisis, we have to start from the time when nationalisation of banks
took place in 1969. Since farmers and capitalists had a long-standing reputation
of non-repayment, the public sector banks observed a receding capital with
compromising profitability and operational autonomy. Situations improved after
nationalization as the deposits grew by 18% on an average between 1969 to 1991.
However, eventually, the focus of the banks shifted from mandatory investments
in Government securities to competitiveness and profitability. Furthermore, during
the turbulent times of the 2008 financial crisis, banks gave out large loans to
ailing companies showcasing an ideal case of ‘irrational exuberance’. The banks
went on an aggressive lending spree without an appropriate due-diligence and
relied on a feasibility reports by the promoters of the borrowing entity.
Besides, the projects that were funded were highly leveraged in nature and
banks did not hold on adequate promoter equity as collateral. To add to this,
banks resorted to ever-greening in order to advance newer loans which ensured
that the non-performing assets remain undetected on the auditory radar.
Pronob Sen , the former chief statistician of
India stated that “short tenures for bank chiefs meant that they decided to
evergreen the loan and pass on the problem to the next head and this cycle
continued”. In 2015, Reserve Bank of India decided to conduct asset quality
review to discover the rot underneath the lending mechanism and thereby clean
the balance sheets. Post demonetization in 2016, banks lent short-term loans to
shadow banks like ILFS (Infrastructure Leasing & Finance Services) who used
them to fund long-term projects. An asset-liability mismatch coupled with
exposure to bad loans sent ILFS tumbling into a state of default.
Cut to the present-day scenario, banks are
still struggling to get out of its hurdles which have been aggravated with the
advent of the novel coronavirus. To begin with, the banks have gone under the
scissors of the rating agencies. Along
with 11 banks, the rating agency Moody’s has downgraded local and foreign
currency deposit ratings of HDFC Bank and SBI to Baa3 from Baa2. The downgrade
is attributed to continual periods of low growth and hurdles faced by the banks
in curtailing the risks arising with the pandemic. The gross NPA is expected to
worsen to 11.3% - 11.6% from the 8.3% figure as of March 2020 which will impact
the credit provision of banks and push its earnings into a decline. There is a
concept of a ‘bad bank’ which is being floated in the culture which will serve
the purpose of a reconstruction company. However, the group of experts have
been split into two parties: for and against, in regards to the feasibility of
the business model of the ‘bad bank’ in these uncertain times.
Since May 2020, personal loans have declined
by 2.46% including credit card loans and housing loans. The automobile sector has suffered immense
losses with shutdown of its manufacturing processes and sales outlets and huge
inventory piling up. With this, bank exposure to automobile sector is also
expected to add to the piling debris of the bad loans. As per the FIDC (Finance
Industry Development Council) data , in FY18, the total number of loans
disbursed to the auto sector was around INR 69,712.72 crore, and in FY19 the
figure was around INR 74,339.93 crore. With this, banks are expected to develop
contingency plans and make additional provisions for the bad loans which are
expected to make their place into the system. With rising strain on wages and
consumer discretionary spending, retail loans are expected to take more hits in
subsequent months. In order to suppress the effects of the COVID-19 pandemic,
Reserve Bank of India (RBI) has planned to remove the Minimum Holding Period
(MHP) for securitization of loans and deregulate the price discovery process.
In the post-COVID India, the banks need to
reinvent themselves in order to stand up to their relevance. It is evident that
when the dust settles, there will be a rise in discretionary spending of the
consumers which will aid the much-required boost in loan disbursement. Technology
will play a significant role in transforming the banking operations. Banks
should invest in technologies to enhance inclusivity across the inaccessible
corners of the country. Taking some much-needed lessons from the sudden disruption
due to coronavirus, banks should reconfigure their operating models to reduce
human intervention for customer on-boarding and credit appraisal. With
increasing smartphone penetration across the country, enhanced customer
experience is the key to establishing strong banking networks. It is no
surprise that the millennial prefer using smartphone technology to manage their
finances and get personalized notifications to stay updated continuously. Thus,
banks should collaborate with the technology companies in order to capture the
newer opportunities created by COVID-19.
