Budget 2022-2023:- Pace of Banking Reforms | Gist of Rajya Sabha TV / RSTV (now Sansad TV) - UPSC PDF Download

Introduction:

Bank credits have increased from 6 percent in 2020-21 to 7.3 percent in 2021-22, though bank deposits have reduced from 11.3 percent in 2020-21 to 9.6 percent in 2021-22. Pursuant to the government’s 4Rs strategy of Recognition, Resolution, Recapitalisation and Reforms, Non-Performing Assets (NPAs) of the banking sector have declined to nearly 8.5 lakh crore as on March 31, 2021. As per the Financial Stability Report (FSR) released by Reserve Bank of India (RBI) in July 2021, macro-stress tests, on the basis of regression modelling, indicate that the Gross Non-Performing Asset (GNPA) ratio of Scheduled Commercial Banks, under the baseline scenario, may increase from 7.48 per cent in March 2021 to 9.80 per cent by March 2022. The net profit of Public Sector Banks (PSBs) surged to over Rs 14,000 crore in the first quarter and further rose to more than Rs 17000 crore in the second quarter ended September 2021. Similarly, private sector banks including HDFC Bank, ICICI Bank and Kotak Mahindra Bank also posted healthy profit with reduction in bad loans. Experts say – timely government action, quick adaptability of the banking industry in conjunction with the power of technology have set the base for credit growth improvement in the coming year as well.

Present condition:

• To sustain the high growth rate India has achieved, the country should carry out banking sector reforms; continue with fiscal consolidation, simplify and streamline GST; and renew impetus on reforms, the International Monetary Fund said.
• India must address the ongoing crisis in its banking sector to support investment and inclusive growth agenda.
• Historically, India’s banking sector reforms — especially in the 199O — focused on enhancing competition, strengthening governance and regulation.
• Future reforms should build upon these areas and draw lessons from past experiences.
• India’s banking system is characterised by a high share of Public Sector Banks (PSBs), accounting for over 65% of total assets.
• We see a steady deterioration of the banking sector in successive quarters.
• There has been policy inaction on reforming the governance of the banking system to distance it from politics.
• Rising NPAs have also put a strain on the health of the PSBs, reflected in their declining Return on  Assets (ROA) and Return on Equity (ROE) ratios.
• The decline in bank’s profits is largely due to higher growth in risk provisions; loan write offs and decline in net interest income. The stresses on the banking sector have translated into a slowdown in industrial credit.
• They also limit banks’ ability to meet international capital requirements.
• Banks are witnessing a surge in willful defaults, or refusal of repayment obligations by borrowers.

Challenges:

• Deteriorating profitability and asset quality pose elevated risks to banking sector stability.
• RBI has warned of further worsening of NPA situation.
• Issues like Punjab National Bank fraud raise the concern for banking sector reform in India.
• With growing Internet and mobile banking, cybercrime is becoming a greater threat.
• Rising willful defaults in PSBs hurt investor confidence. Political interference while granting loans.
• More exposure to corporate loans by PSBs while private banks maintain a balance between corporate and retail sector loans. India’s banks lag behind global counterparts in terms of financial depth or the size of banks.
• India also has low levels of private credit to GDP and credit to deposit ratio, relative to other emerging economies. Insights Mind maps www.insightsonindia.com
• With oil prices rising it is difficult for controlling the fiscal deficit, current account deficit and inflation.

Way Forward

• Need to build capacity in the PSBs to evaluate lendable projects.
• Urgent need for freeing PSBs from political interference.
• Reducing the government equity below 51%, and attracting some strategic investors.
• It will not only reduce the pressure on government for recapitalization, it will also set the stage for a more commercial orientation for public sector banks. Comprehensive approach to improve the capacity, risk management and governance of the PSBs.
• Revive bank credit and enhance the efficiency of credit provision; accelerate the clean-up of bank and corporate balance sheets.
• Willful default must be recognised early and followed by quick action.
• Ensure balanced exposure to retail and corporate sector lending.
• Amalgamate banks into bigger entities by mergers and acquisitions and ensure capital adequacy as per the Basel norms. Developing corporate bond markets to relieve pressure from banks as lending sources.
• Banks need to do forensic audit for ascertaining the end use of funds.
• To build a robust banking system, recapitalization will have to be complemented by lower entry barriers, improved financial supervision, and efficient debt recovery mechanisms.
• Decisive and urgent actions are necessary for not merely ensuring the stability of the banking system, but also to create conditions for sustained accelerated growth.