After the 2007-08 crisis, when Western banks tightened their checks-and-balance systems, why did Indian banks relax their operational norms, asks SUDHANSU R DAS
The GDP was clocking an average of seven per cent per annum between 1996-97 and 2010-11. Non-performing assets in the banking sector steadied at 2.36 per cent in 2010-11. Then, suddenly, the NPA graph showed an upward trend. Between 2007 and 2013, public sector banks added five lakh crore rupees in bad loans. This was odd given that the Indian financial sector piled up stressed assets even when it was not fully integrated into the global financial architecture and escaped the shock of the 2007-2008 financial crash. What went wrongIJ
The banking sector had the golden opportunity to consolidate its gain from the GDP growth. But were PSBs in a hurry to lend to risky sectors after the crash which had shaken the financial sector in US and its spillover effect reached the developing worldIJ When banks in West tightened their checks-and-balance systems, why did Indian banks relax their operational normsIJ Bank amalgamation, appointment of private sector professionals, re-capitalisation, loan restructuring and one time settlement are no solution for the banks' bad loan problems.
The large number of suicides in industrially developed States showed that a large part of the low interest credit had not reached the deserving farmers. In Kerala, agriculture is not viable for small and medium-scale farmers due to the high input cost, politics and middle-men control. labour charges are high. Corporates control the production of many items such as tea, coffee, coconut, paddy, rubber and spices. low interest loans and subsidies find their way to big corporates. Small and medium farmers prefer to either lease their land or sell it to the rich and live off the interest. Here, bank credit cannot perform unless a climate is created for small and medium farmers to produce at low costs and sell their goods. If the credit cycle, from sanction to re-payment, is not closely monitored, it will generate NPAs. The Government is left with few options but to re-capitalise the banks with tax payers' money. Between 2011 and 2014, the Government infused `58,600 crore to protect PSBs' capital. In 2015-16, the Union Government provided `7,940 crore for capital infusion in PSBs.
A big capital base will help banks give big loans for bigger profit margins. But banks have to monitor big loans at every stage. Credit rating service Crisil has found that more than 46,000MW of power projects, mostly controlled by the private sector, face significant risk due to insufficient fuel supply arrangements, aggressive price bids by developers and a lack of long-term buyers. This has created a debt of `75,000 crore in the books of banks and financial institutions.
Why did the banks not properly examine the viability of the power projects before sanctioning the loansIJ According to the RBI annual report, outstanding bank credit to the infrastructure sector increased from `7,243 crore in 1999-2000 to `78,6045 crore (around 100 times) in 2012-13. Power, steel, construction, infrastructure, telecom, metal and mining sectors consumed 50 per cent of the total unhealthy debt.
What is the guarantee that banks will not lend abnormally in the future with a bigger capital baseIJ Former RBI Governor D Subbarao has reportedly said that big banks should not acquire monopolistic market power, adopt predatory behaviour or force smaller banks into unviable models. The 2008 credit crisis witnessed the fall of big banks too. The US Federal Reserve favours shrinking the big banks to make them less risk-prone.
Big banks in India should evolve along with demand only. let the banks decide when and how they will go big. In a developing nation like India, if a big bank collapses due to financial turmoil outside the nation, it will affect millions across the country. Safeguarding the interests of depositors and doing public good through credit are the two main objectives of banks. Bank credit cannot create assets if politicians, police, judiciary, media and extension service departments do not perform well. If the manager of an isolated bank branch is not protected by police and judiciary, he may fall to local pressure and sanction bad loans.
The RBI has advised all banks to give top priority to credit risk management, measure risk through credit-rating and scoring, and quantify the risk by estimating expected and unexpected loan losses. The question here is: Where will the banks will get people with integrity and a sense of purpose to implement these banking normsIJ Bankers, like other professionals, are products of a society which has limited its role in producing quality human resources.