The banking sector is in bad shape and the damage to the credit cycle is deep and severe. Banks have to learn how to wade through global traps and opportunities, and this will only be possible under the guidance of a team of experts
In a healthy credit cycle, bank credit flows out and ploughs back to the system after serving its purpose. The purpose of credit is to help the entrepreneur earn surplus amount after the re-payment of the loan. Therefore, before sanctioning a loan, bankers make a thorough appraisal of the project, to know whether the entrepreneur can earn surplus from his venture. Good governance, a transparent marketing network and moderate inflation helps the entrepreneur earn surplus after re-paying the bank loan which ultimately helps nurture a healthy credit cycle.
However, a healthy credit cycle seldom grows in isolation. For example, villages can prosper only when they earn surplus income from their entrepreneurship. For increasing village income, the Government has to make the soil fertile, repair the water-table and improve bio-diversity. Quality schools, healthcare facilities, transparent marketing facilities, quality extension services, good governance, safety etc always makes the village an attractive place.
It has been reported that 35 per cent 40 per cent of the fruits and vegetables in India rot in the farm yard. A 100 per cent foreign direct investment in processed food is not the solution. The challenge is to provide a transparent market chain, storage facilities and an effective transportation system to the farmers. The Union Government has spent lakhs of crores of rupees building roads, godowns and market yards, but these infrastructural facilities have to perform to help the farmers earn surplus.
Farmers in Ratnagiri district of Maharashtra sell Alphonso (mango) at Rs20 to Rs25 per kg in their farm yard, but when the mango reaches Mumbai, Pune or Nashik, its price rises to Rs80 per kg. Alphonso is also sold in the Gulf and in Europe but the mango farmers hardly know about the export price. This is because traders and middlemen manipulate the agriculture produce price. The farmers lose income and the credit cycle is affected.
As per the National Sample Survey Organisation, about 40 per cent of the Indian farmers want to leave farming. Today more than 90 per cent of agricultural graduates prefer jobs in banks, Government departments and the insurance sector. The Government, instead of giving subsidy, daily wages and free food, should repair the water table, the bio diversity, the top soil, the rivers, ponds, lakes and water bodies.
Banks credit can generate interest income for the banks and surplus for the farmers if basic requirements of village productivity is ensured. Politicians and planners may seek advice from social activist Anna Hazare who has developed his village Ralegan Siddhi into a happy and productive village.
During summer, when large parts of Maharashtra faces water scarcity, Ralegan Siddhi has enough water to sustain two crops. The credit flow to Ralegan Siddhi has not turned into a non-performing asset. Bankers with honesty and integrity can auto repair the credit cycle. But honest bankers can survive only if politicians, the police and judiciary protect them.
Though the credit cycle in the agricultural sector is impacted, bad loan in this sector is less in comparison to coal, realty, power, infrastructure, steel, telecom, mining and aviation sectors. These sectors contribute to more than 50 per cent of the bad debt.
Gross non-performing asset of 39 banks has reached Rs4.38 trillion for the quarter ended December 31, 2015, which shows that the credit cycle principle was grossly violated after 2008. The Indian banking sector was in good shape with less than 2.36 per cent NPA till 2010-11 when it was partially integrated with the global financial sector. Ever since the integration process picked up pace, the NPA graph has shown a sharp rise.
The Indian banking sector added five lakh crore rupees in bad loan between 2007 and 2013. After 2010-2011, the public sector banks aggressively financed risky sectors. Clearly, the banking sector has to learn how to wade through global traps and opportunities. This will be possible only under the supervision of a group of experts.
The damage to Indian banks’ credit cycle is deep and severe. Unless the banking sector takes concrete measures, its credit cycle is beyond repair. More than 70 per cent of the total deposit of people are parked in public sector banks which have a wider outreach than private banks.
Many developmental schemes of the Government are routed through PSBs. Project appraisal skill, audit, attitude to the public and accuracy of data can improve banks' efficiency. For the next 10 years, politicians should not interfere in the financial decision-making process. let the banks decide who will be their Chief Executive Officer and the Board of Directors without any external pressure.
The Government can form an independent supervisory team of experts to evaluate the performance of the heads from time-to-time. PSBs are the backbone of the financial sector. They can do business and social good only when they have a dedicated research team to access the economic sectors.
The banking sector needs to have an authentic survey report on India’s potential economic sectors for accurate credit projection. Banks credit cycle is built over authentic potential survey. Had banks prepared an authentic survey, such massive credit would not have disappeared into the steel, power, infrastructure, realty, construction, telecom, mining and aviation sector. But with team work, experience and knowledge, the Indian banking sector can bounce back as the country offers huge business opportunities to all.