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
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.
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.
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