A developing country is on the track of a successful trajectory when it’s banking system is strong and reliable. Banking sector recently is proving itself to be the backbone of a successful economy. With the monetized economies on the rise it happens to be a prerequisite demand that is worthy of attention.
Lately Indian banking system has been flouting the very aspect of safe keeping of public asset with it’s soring NPA crisis in history. Moreover, Indian government’s sheepishly reluctant attitude to handle the crises only digs the grave of the mighty Indian banking system. On 9 may 2017, the news press in India screamed about Vijay Mallya’s felony to 17 banks owing them 90 billion which sent a wave of shock throughout the market.
Similarly CBI received two complaints from PNB against billionaire diamantine Nirav Modi and a jewellery company alleging fraudulent transactions worth about 11,400 crore. State Bank of India recently posted a staggering loss of 6968 crore in FY-19.
NPA stands for Non-Performing Asset, a loan or advance for which the principal or interest payment remains overdue for a period of 90 days. In other words a dead asset for the bank which no longer will generate any revenue. Indian Public Sector banks collectively owed approximately 6.8 trillion Indian rupees as non-performing assets at the end of the fiscal year 2020.
With such humongous revenue losses especially in the public sectors which are usually offset due to various faulty and pretentious socialistic schemes of the government like MUDRA which gives out loans to less creditworthy or the needy people, banks file for bankruptcy.
NPA crisis reasons also include lack of intermediate contact between the bank and the government, state control of the banks with red tapism and inefficiency due to shorter tenures of executives and usually wage discrepancies. With loss of revenue the credit worthiness of a bank dies or rather even a speculation about it leads to it’s slow death. As the consumer confidence is shaken, an individual instinct orders him or her to withdraw his or her money from the banks, which ultimately leads to bankruptcy.
NPA crisis also takes place when top banks are not transparent about their npa crisis and also ill coordination due to dual control by RBI and centre through finance industry. Instead of tending to the grievances of the banking system, government usually resorts to recapitalization, a short term ineffective strategy through taxpayers money.
2019 budget announced a 70,000 crore bank recapitalisation programme to help public Sector banks shore up their capital reserves. With recapitalization of the banking sectors, inefficiency creeps into the system leading to another npa crisis followed by another recapitalization. Thus an unending vicious cycle seals the fate of not only the banking sector but also the economy as a whole. With banking system weakened and wreaked, lower finances are available for investment, a key driver of the economy.
State run banks account for 70 percent of the overall market share in terms of asset size of Indian banking system. India ranks 5th in list of countries with highest NPA levels. It’s non performing ratio stood at 9.1 % in September 2019 which came down from 11.2% in FY18, as a recognition that bad loans neared completion. Thus what is the need of the hour is to reform the banking system for a ‘ATMANIRBHAR BHARAT’.
Privatisation for efficiency sounds a reliable way out as per Mr. Raghuram Rajan. Recently banks have relied on Asset Reconstruction Companies (ARC). Basically, ARC buys bad loans at a steep discounted rate and take measures themselves for recovery. This leads to private owned ARCs to make profit and get good returns.
This method usually leads bank to be in loss but helps them to keep their loan books clean. But recently, this system is proving to be faulty as ARCs are demanding steeper discounts.
Therefore, Government has come up with “bad Banks” scheme, which will be owned by the government or the private shareholders or the bank themselves and it can act as a temporary solution. These Bad Banks are to buy bank’s bad loans at the market price and then recover them using various arduous methods. This idea suggests that it will keep bank books clean until a permanent solution is crafted.
But this method requires buying, selling and recovery of bank’s stressed assets which turns out to be a tedious and an exhaustive task.
So, when will a probable solution to the bad loan crises be crafted, is still a mystery.