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The recent incidents in the banking sector in India have spotlighted its weak spots. At places, the banking officials are underplaying the issue but the public sector banks seem worried about risky investments and are apprehensive of providing bad loans. The recent scams have shaken public confidence. As of December 2017, India’s listed banks had bad loans of around Rs. 8.4 lakh crore. It can be noted that Punjab National Bank’s loss from the Nirav Modi scam will be less than 0.2% of the bad loans of commercial banks.

Out of the total 21 public sector banks, 11 are now under the RBI’s Plan of Prompt Corrective Action (PCA). More and more banks are being inserted in this plan. This plan imposes certain restrictions on banks for performing operations, hiring candidates and also involves certain restrictions on the banking management system.

The cumulative loss of public sector banks crossed a whopping Rs. 87,357 crore in the 2017-18 fiscal year (FY). Out of the total 21 banks, only two have submitted their profit reports in 2017-18 FY. The Indian Bank posted a profit of  Rs. 1,258.99 crore and Vijaya Bank’s profit was of  Rs. 727.02 crore. The rest were running at loss of about Rs. 87,357 crore during the 2017-18 FY. India’s largest bank, the State Bank of India (SBI) also suffered a net loss of about Rs. 6,547.45 crore in 2017-18 FY as compared to a net profit of  Rs. 10,484.1 crore in 2016-17.

The role of the public sector banks (PSB) cannot be undermined in the context of India’s economic growth. They cater extensively to India’s rural population and there are various socio economic agendas that the public sector banks cater to. The circumstances under which the PSBs sanction loans, the markets that they take into account and the constraints that they face are vastly different from the private sector banks.  

Background of the present crisis in banking sector

l   The GDP quotient: According to Trading Economics, India recorded a current account deficit of 1.9% in the country’s Gross Domestic Product (GDP) in the 2017-18. Current Account to GDP ratio in India averaged 1.15% from 1970 until 2017 and reached an all-time high of 2.30% in 2003 and reached a record low of -4.80% in 2012.

l Rising NPA: The rising NPA of the banking sector has contributed in building the negative figure of GDP though the PSBs are reportedly projecting operating profits. The following table shows the quantum of waived off loans of PSBs – ·        

Analytical factors

Malabika Roy, Professor, Department of Economics, Jadavpur University, Kolkata, told BE, “There is no doubt that public sector banks are going through a rough phase. During 2015-16 and 2016-17, the two indicators of profitability which are return on assets and return on equity have both turned negative for the public sector banks. Gross NPA ratio increased to 11.7% in 2017 from 3.8% in 2013 for the public sector banks whereas it increased to 4.1% from 1.9% for the private sector banks over the same period. The recovery rate of NPAs was also poor for the public sector banks (25.1%) as compared to the private sector banks (41%) during 2015-17. While both the private sector banks as well as the public sector banks have suffered from sluggish growth of credit, the deterioration is much more for public sector banks. All these point towards possible governance related issues for the public sector banks.”

l Role of the central banking system: Samir Ghosh, General Secretary of the All India Reserve Bank Employees Association in his letter dated May 22, 2018 to Urjit Patel, Governor, Reserve Bank of India, stated, “RBI requires to upgrade its on-site monitoring by physical inspections which has been diluted substantially meanwhile, perhaps on the false perception that banks being responsible entities will follow norms.”

l Social stand of PSBs: Ghosh told BE, “After the bank nationalisation, no public sector bank has failed, excepting IDBI which is being taken over by LIC which is another public sector institution. Moreover, public sector banks have wider reach and cater to remote areas in India. Nowadays, due to several governmental and banking schemes, the poor people keep their small deposits in the public sector banks. In that way, the PSBs bring the poor under the purview of the banking sector and also strengthen the national economy.”

l Factors of NPA: Ghosh said, “NPA of PSBs arise because of factors that are beyond the control of these banks. The primary reason is that the public sector banks are being owned by the government and ministers and top bureaucrats may often persuade the PSBs to lend money to undeserving projects or people. Secondly, due to lack of skills, the banks sometimes do not check the appropriateness of the projects on which they are lending, so when these projects fail, banks incur losses. Thirdly, as the investment policies of PSBs are related to the national economic developments, they are sometimes forced to invest money in non-profitable sectors, where it takes very long to get returns and that  hamper the health of these banks.” 

He mentioned, “Another important factor of NPAs in PSBs is that after independence, both the central and state governments invested in developmental projects through PSBs in the forms of long term loans. Long-term loans are never the priority area for lending.” He added, “In spite of all these factors, the PSBs are doing well as they have good operating profit and will survive because of people’s inherent confidence on government ownership. PSB still heads over the private investment entities due to the trust factor.”

Solutions for the PSB’s:

The following steps could be undertaken to improve the financial performance of the public sector banks which are as follows:

l Improving the rate of productivity per employee: Indian banks have often negotiated hard with its employee unions to concede to their claims. This has resulted in significant disenchantment among the banking employees, and has mostly been preceded by strikes and long drawn out negotiations. This system of industry by settlement has outlasted its utility as it has curbed down the banks’ freedom to negotiate with their own employees as most of terms are decided by the government. Considering the present day scenario, it is more appropriate to dismantle the industry wise weight settlement system in favour of individual banks entering into wage agreements with their own employees. They can therefore deal with their own employees depending on their own productivity, profitability and service requirements.

l Improving customer service: In many cases, banks fail to fulfil their obligations towards their customers. A more robust and transparent charter of bank customers’ rights with built-in compensation for non-compliance by banks would greatly improve customers’ service in banks making the banks accountable for their actions.

l Consolidating the trust and confidence: Banks have started imposing charges for withdrawing our own money from ATMs. Limits on the number of free transactions and such measures discourage the customers. The recent banking scams have also shattered public confidence and hampered the credibility of the banking sector. There is need to clear this mistrust and lack of confidence in banks.

l Improving NPA management: Non-performing assets (NPA) are the biggest problem faced by the banks. Even today, banks are at the mercy of big borrowers which happen to be large MNCs and wealthy promoters. Simply declaring them wilful defaulters, does not solve the problem. According to former RBI governor, Dr. Raghuram Rajan, “The most obvious reason is that the system protects the large borrower and his divine right to stay in control.” A special insolvency law should be immediately enacted to control the problem.

Apart from these, various other measures like improving the norms of priority sector lending, improving corporate governance, placing inspection rating of banks by the RBI, making bank auditors accountable for their failures and avoiding dual control of public sector banks should also be adopted for improving the health of the Indian banking
system.

Prevent assets from becoming stressed by increasing the loan payment periods. Create conditions and policies for industry to be able to payback loan.

Government measures

Numerous government committees have been set up to address governance related problems in the banking sector and to implement various programmes to ensure that the banks meet minimum regulatory requirements. Of these, the most prominent one is called the ‘Indradhanush’ or Rainbow plan and it includes a four-year PSB recapitalisation plan, with capital provided to banks based on criteria including size, efficiency and need for capital and also the establishment of Banks Board Bureau (BBB) in April 2016 to reform the government structure of PSBs.

The government also plans to inject Rs. 70, 000 crore into PSBs in the FYs of 2016-19. Rs. 25, 000 crore of this has already been provided. But the banks urgently need a larger capital inflow. Moreover, a clean-up of bad loans and the establishment of the BBB for improving governance in the banking sector will be helpful for the sector.