Preventing bad loans

As banking system is plagued with political interference, it’s time to give total freedom to institutions like RBI

Gaurang H Shah | August 11, 2016


#Banking   #Bad Loans   #RBI  

The level of NPAs with public sector banks accumulating over the last many years has seen a sharp spike and is not going to come down in a short or medium time frame. It is also necessary for us to understand that if the economy of a particular country does well then the backbone of that economic recovery has always been financial institutions and the banking sector.

With the provisions prepared by banks to prevent bad loans, there is some positivity and optimism in the banking sector which was otherwise performing poorly earlier. This was a priority as the RBI had changed the rules regarding the way banks were treating their NPAs. After this, during the third and fourth quarters of the last fiscal, the management of various public sector banks has been optimistic and are determined to recover the bad loans and be more vigilant in further disbursements.

The banking sector has been under pressure primarily from sectors like metals, power, infrastructure and state electricity boards. These sectors have large part of exposures as far as loan books of banks are concerned. Government initiatives to revive these sectors along with the power ministry’s plan for 24-hour power supply are going to bring some positivity. Loans under pressure from these sectors will become good over a period of time improving the balance sheet and also the health of public sector banks.

With the lowering down of RBI interest rate during the past one and a half years, the banking sector is going to achieve a major reform. Low interest rates will lead to an improved performance of the sector. However, a lot will vary from case to case as banks have varying NPA levels and provisioning. The remedial steps being taken by the RBI in the form of reforms will slowly improve the health of balance sheets of public sector banks which are already under tremendous pressure because of bad assets and rising provisioning numbers. Meanwhile, investors have to be careful choosing the long-term investment.

The Bankruptcy Bill is one step to enable banks to recover bad loans. With RBI bringing in a uniform rule, all banks have to adhere to it. The spill-over effect in change of provisioning norms by the RBI could be seen in the earnings to come and some banks may see a turnaround.
The efforts taken by the government are also going to give a boost to loan disbursement. With higher loan disbursement interest, income too is likely to be much better than what we have seen in the last few months.

Consolidation of banks

The consolidation of associate banks into SBI will pave the way for a very strong banking entity after merger. The process may take longer but the state of balance sheet, the CASA ratio, treasury expenses, loan books, and interest income and margin are going to look much more robust than ever. Out of the 27-28 public sector banks many have a weak balance sheet and growth outlook. The government has said that it is looking at consolidation of smaller banks into larger ones. If and when this happens, it will pave the way for financial consolidation of these banks and make the banking system much more robust.

Governor’s three-year tenure is not enough

There are many candidates who can replace Raghuram Rajan but at the same time his capability, calibre, experience and understanding of local and global markets will always leave a vacuum. It would have been prudent if the RBI governor had continued for a second term, but more than that the government should extend the RBI governors tenure to five-six years keeping in view that any initiative or change that the governor wants to bring in will not be fulfilled in just a period of three years.

Steps taken by Rajan like constitution of a monetary policy committee, licence on-tap and small payment banks are in the right direction and they are going to bring in some amount of confidence and positivity and need to be taken forward.

Autonomy

Institutions like RBI should be given total freedom when it comes to deciding crucial policies including interest rates, inflation levels and Indian banking sector growth. The banking system has also been plagued by bureaucracy and political interference. If you want to bring in individuals from private sector banks to public sector banks there should be enough distance from bureaucrats and politicians and no interference in the functioning of the banks as far as PSU banks are concerned.

Shah is vice president, Geojit BNP Paribas Financial Services.
He spoke with Geetanjali Minhas.

Comments

 

Other News

Charming tales of the Snakeman’s early years

Snakes, Drugs and Rock ’N’ Roll: My Early Years By Romulus Whitaker with Janaki Lenin HarperCollins, 400 pages, Rs 699

Gripping graphic narrative helps make sense of pandemics past

The Moral Contagion By Julia Hauser and Sarnath Banerjee HarperCollins, 140 pages, Rs 699 The world has lar

“Globally, there is unprecedented positivity for India”

Addressing the Viksit Bharat Viksit Uttar Pradesh program in Lucknow on Monday, prime minister Narendra Modi launched 14,000 projects across the state, worth more than Rs 10 lakh crore at the fourth groundbreaking ceremony of UP Global Investors Summit held in February 2023. The projects relate to sectors

World’s biggest bird-a-thon begins in India

During the four days from Feb 16, more than a thousand birdwatchers throughout India are coming together with the goal of documenting as many birds as possible across the country’s diverse locations. Over one lakh birdwatchers globally participate in the annual Great Backyard Bird Coun

Comments sought on Draft Guidelines for Prevention of Misleading Advt in Coaching Sector

The Central Consumer Protection Authority has sought public comments on the ‘Draft Guidelines for Prevention of Misleading Advertisement in Coaching Sector’. The draft guidelines are placed on the website of the Department of Consumer Affairs and are accessible through the link:

Electoral bond scheme unconstitutional: Supreme Court

In a landmark judgment, the Supreme Court of India has held the anonymous, unregulated and unlimited funding through electoral bonds and companies as unconstitutional. The five-judge Constitution Bench of the Supreme Court comprising chief justice DY Chandrachud and justices Sanjiv Khanna, B

Visionary Talk: Amitabh Gupta, Pune Police Commissioner with Kailashnath Adhikari, MD, Governance Now


Archives

Current Issue

Opinion

Facebook Twitter Google Plus Linkedin Subscribe Newsletter

Twitter