Narendra Modi Government completed nine years in office. In 2014 when Narendra Modi took charge of Government from the incumbent UPA, the conditions of the Public Sector Banks were not in good shape. Banks were nationalised but used by corporate and politicians nexus. The Modi Government changed the system completely. The hidden liabilities of financial institutions, that were brushed under the carpet, were thoroughly exposed. In 2015, the Government decided to launch a transparent AQR, which effectively put an end to indiscriminate lending.
The economy of a country is as progressive as is the strength of its banking system. Today, India’s economy is moving forward with a continuum. This is becoming possible because in these nine years, the country has shifted from the pre-2014 ‘phone banking’ system to digital banking. Gross non-performing assets or NPA ratio has declined significantly. All PSBs have witnessed significant profit all these years and jumped three times in from 36,270 crores in 2014 to 1.04 lacs crores in 2023.
All this could be possible due to the Government’s comprehensive 4R’s strategy of recognising NPAs transparently, resolution and recovery, recapitalising PSBs, and reforms in the financial ecosystem. Major banking reforms undertaken by the Government over the last nine years addressed credit discipline, responsible lending, and improved governance, besides the adoption of technology, amalgamation of banks, and maintaining general confidence of bankers.
Actually Banks provide capital in the form of debt to drive the economic activities. It is no secret that the banking sector is the heart of any economy with India being no exception. It is not an allegation but truth that many corporate secured lending merely on a phone call from the UPA government. Unsurprisingly, some of these corporate have eventually turned willful defaulters. None of the 12 biggest defaulters who between them account for over 1.75 lakh crore of NPAs were given loan by the Modi government. In fact, aggressive lending, willful defaults along with frauds, corruption in some cases and economic slowdown were cited as the reasons by RBI for the spurt in stressed assets.
Fixing Loopholes in the banking sector
For the speedy recovery process the government brought (IBC) The Insolvency and Bankruptcy Code. Before the IBC came into force in 2016, companies under bankruptcy proceedings would take inordinately long time to be liquidated. Nearly half of the cases took more than ten years and 15 per cent more than 25 years to complete. The IBC provided for a market-linked and time-bound resolution of stressed assets. The IBC made it easier for banks to recover their defaulted loans.
Hundreds of bankruptcy cases resolved under the IBC until December 2022 took, on average, 482 days, barring the time excluded by the NCLT. The IBC stipulates a maximum of 270 days to resolve corporate bankruptcy.
Further to strengthen these Banks The Prompt Corrective Action was reviewed in 2017. A PCA framework is evoked when certain limitations placed on banks are exceeded. These limitations are based on the levels of capital and assent qualify profitability. When the number of negative returns on assents runs into 4 consecutive years, the restriction is applied. In early 2018, there were 12 banks under this framework, and among these, 11 were Public sector banks. Under PCA certain operations were restricted. Special audits were done. New management boards were constituted by superseding the bank’s board of directors.
Robust Monitoring and Risk Management of the Public Sector Banks
Under recapitalisation, over the last three Financial Years, PSBs have been recapitalised to the extent of Rs. 2.87 lakh crore, with infusion of Rs. 2.20 lakh crore by the Government and mobilisation of over Rs. 0.66 lakh crore by PSBs themselves. Besides recapitalisation, other steps taken by the Government to improve the condition of banks, including Fugitive Economic Offenders Act, 2018 has been enacted to enable confiscation of fugitive economic offenders’ property. Heads of PSBs have been empowered to request for issuance of look-out circulars. National Financial Reporting Authority has been established as an independent regulator for enforcing auditing standards and ensuring audit quality.
For effective monitoring and ensure proper due diligence in project financing, Board-approved Loan Policies of PSBs now mandate tying up necessary clearances/approvals and linkages before disbursement, scrutiny of group balance-sheet and ring-fencing of cash flows, and appraised of non-fund and tail risk. For mitigating risk on account of misrepresentation and fraud, use of third-party data sources for comprehensive due diligence across data sources has been instituted. For clean and effective monitoring, monitoring roles have been strictly segregated from sanctioning roles in high-value loans, and specialised monitoring agencies combining financial and domain knowledge have been deployed for effective monitoring of loans above Rs 250 crore. To ensure timely and better realisation in One-Time Settlements (OTSs), online end-to-end OTS platforms have been set up. For faster processing of loan proposals, Loan Management Systems have been put in place for personal segment and MSME loans.
For effective and strengthen governance at the Board level, the position of Chairman and Managing Director (CMD) has been bifurcated into separate positions of a Non-executive Chairman and a Managing Director (MD) and Chief Executive Officer (CEO). And a professional Banks Board Bureau (BBB) has been created for arm’s length selection of non-executive Chairmen and whole-time directors.
Public sector banks (PSBs) which once battled with poor asset quality, bad debt, capital adequacy issues and weak balance sheets have reported a stellar performance in the July-September quarter
By addressing the underlying causes behind the build-up of stress in PSBs through comprehensive reform to change credit culture and tighten discipline for stakeholders across the financial system, institutionalisation of robust underwriting and monitoring, fundamental governance reforms, and leveraging of the transformation potential of technology, the risk of recurrence of excessive stress in PSBs has been considerably minimised and PSBs have emerged stronger.
Stellar performance of India’s Banking Sector
The Indian banking industry is in a far better position today. Public sector banks (PSBs) which once battled with poor asset quality, bad debt, capital adequacy issues, and weak balance sheets have reported a stellar performance in the July-September quarter with some even reporting record profits. They have also recorded an impressive pace of credit growth. The turnaround in the performance of public sector banks is also getting reflected in the stock market performance of these banks.
The goal set by the Government of India for growth in several sectors through Aatma Nirbhar Bharat, data localisation, promotion of manufacturing in India etc. will not be achievable without a strong and growing banking sector since each of these areas would need long term lending. Hence the road ahead for the banking sector is one of growth and expansion. No doubt that this could be possible due to Government’s comprehensive 4R’s strategy of Recognising NPAs transparently, Resolution and recovery, Recapitalising PSBs, and Reforms in the financial ecosystem. But one more factor is behind all these efforts are workforce of the Banking Industry. At present there is a tremendous pressure on the workforce, since there is a shortfall in the recruitment of workforce. If government take corrective action in this regard, surely these banks can show for growth and contributed in Aatam Nirbhar Bharat.
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