Intro: The root cause of crisis in Banking Sector is poor credit appraisal, lack of credit monitoring, and political interference in decision making.
Public Sector Banks’ Gross Non Performing Assets (GNPA) and the restructured assets have reached an alarming 12.9 per cent of the total advances as on 30 September 2014. The size of gross NPA, the restructured advances, the loan waiver packages and the loan already written off together will cross nearly Rs 6.5 lakh crore. Financial sector pundits blame poor credit appraisal, lack of credit monitoring, political interference in decision making and economic slowdown etc. for the massive bad loan. Though political interference is a nagging issue, there are many whys which are to be answered for the good of the banks and their millions of innocent depositors. The question is when Banks had various inspections before every loan disbursement, why it had accumulated huge bad loan. With so many tools in hand, banks could have tamed the NPA growth before it turned out to be a crisis. An exercise to work out credit to risk weighted assets and proper NPA assessment could have helped bankers to reshuffle the time buckets well in advance. This could have prevented NPA growth.
When the financial sector in US and Europe crashed after Lehman Brothers’ collapse in 2008, Indian banks were in good shape with an average capital adequacy ratio (CAR) above 12 per cent and the GDP growth cloaking at an average 7 per cent annum. After 2008, when bankers in developed nations tightened their regulatory mechanism, why did the bankers in India slacken the appraisal norms and internal checks and control system in spite of knowing the looming crisis. What were the external and internal factors which had influenced bankers in India?
Lending to risky sectors beyond its potential is not a sound banking policy. Unscientific credit projection far beyond the actual potential is one of the main reasons for accumulation of bad loan. The recently concluded Gyan Sangam summit in Pune discussed various mechanisms to prevent NPA growth in banking sector. Pressure is on for recapitalisation, loan restructure, one time settlement and loan waiver. The big why is whether the recapitalization, loan restructuring, loan waiver and one time settlement can address banking sector crisis which has its root in poor credit appraisal, political interference mainly in state co-operative banks, poor credit monitoring, poor selection of borrowers, loss of entrepreneurship and societal behavioral change for grant and subsidy. In order to stem the rot, Banks need to revamp its HR policy as maximum frauds in banks are linked to internal staff. The banks have to put in place a transparent recruitment policy for its board of directors and CEO.
Indian banking sector is fast drifting away from sound loaning operation to investment banking. This happens mainly due to difficulty in recovering the loan from borrowers due to political interference, growing documentation frauds, long and painful legal procedures to recover loan from willful defaulters and lack of social safety. For the first time in the history, the Modi government has stated it would not interfere in banks’ functioning.
As per Banking Regulation Act, Banks have to serve social good while doing business. Private banks should come out from their comfort zone and share the social responsibility of opening zero balance accounts, meeting priority sector’s need and stepping up development banking activities like PSBs for social good. Prime Minister Narendra Modi has advised bankers to be fearless in taking financial decision which is a positive gesture.
In order to make credit serve social good, the Union Government has to take every step to create credit absorption capacity in different sectors. So, there is a need for small, medium and big banks for a strong financial sector. The main objective of banks should be to nurture a healthy credit cycle. If the credit cycle is healthy, credit would serve the ultimate purpose of generating surplus after repayment of loan. It would create real assets for the borrowers which will ultimately bring
prosperity to the family and the country as a whole.
Sudhansu R Das (The writer is a Hyderabad based