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Sansad TV: Perspective- Health of India’s Banking System

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Introduction:

The Indian banking sector remains resilient and stable. Various parameters relating to capital adequacy, asset quality, liquidity, provision coverage and profitability are healthy. That’s the statement from the Reserve Bank of India amid heightened concerns about the exposures of banks to a business conglomerate. Allaying fears of systemic risks, the central bank has said – As the regulator and supervisor, the RBI maintains a constant vigil on the banking sector and on individual banks with a view to maintain financial stability. Banks are also in compliance with the Large Exposure Framework (LEF) guidelines issued by the RBI. The statement from the RBI was a reiteration of what Finance Minister Nirmala Sitharaman said on the issue. She, too, had asserted that the Indian banking system remains healthy. Having gone through the twin balance sheet problems, the system is at a comfortable level. NPAs are coming down, recovery is happening and the position is very sound. That was the precise statement made by the Finance Minister.

How is Indian banking unique?

  • The banking system in India defines banking through the Banking Companies Act of 1949. With the potential to become 3rd largest banking industry by 2025 according to some reports, India’s banking and financial sector is expanding rapidly.
  • The Indian banking industry is currently worth more than 1 trillion dollars and banks are now expanding fast as the present Central Government wants to spread the tentacles of the banking industry far and wide.
  • Sound regulatory practices and government interventions when banks have faced difficulties (Yes Bank).
  • Different balance sheet structures – household savings constitute a major part of bank deposits in India, which can’t be withdrawn in bulk quantities.
  • A large chunk of Indian deposits is with public sector banks, and with very strong private sectors lenders such as HDFC Bank, ICICI Bank and Axis Bank.

Evolution of Bank reforms in India

  • The government through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, and nationalized the 14 largest commercial banks on 19 July 1969.
  • After India liberalized its economy in 1991, then finance minister Dr. Manmohan Singh set up Narasimham Committee – I to analyze India’s banking sector and recommend reforms.
  • In 1998, Banking Sector Committee (Narasimham Committee – II) was set up to further bring in reforms. The task of the Committee was to review the progress of the implementation of reforms and to suggest a design for further strengthening of the sector.
  • Since 2014, the banking sector has witnessed the adoption of the JAM (Jan-Dhan, Aadhaar, and Mobile) trinity, and the issuance of licenses to Payments Banks and Small Finance Banks (SFBs) to achieve last-mile connectivity in the financial inclusion drive.
  • In October 2015, the Government announced Mission Indradhanush under which 7 key strategies were proposed to reform public sector banks (PSBs).
  • The Ministry of Finance in its Economic Survey 2015-16 suggested four R’s – Recognition, Recapitalization, Resolution, and Reform to address the problem of NPAs.
  • The government announced new banking reforms, involving the establishment of a Development Finance Institution (DFI) for infrastructure, creation of a Bad Bank to address the problem of chronic non-performing assets (NPAs), and privatization of public sector banks (PSBs) to ease its burden in terms of mobilizing additional capital.

The issues affecting the banking sector of India

  • Issue of Monetary Transmission:
    • Like reduced profits, this is also an off-shoot of burgeoning NPAs in the system.
    • Change in the key policy rate was not reflected in lending rates as banks are not willing to transmit the benefits of a low-interest policy regime due to the low availability of liquidity against the backdrop of high NPAs.
  • Non-Performing Assets
    • Scheduled commercial banks (SCBs) were carrying NPAs worth Rs 8.96 lakh crore on their balance sheet at the end of March 2020.
  • Wilful Defaulters:
    • The slowdown in the economy in the last few years led to bad loans or NPAs.
    • There are defaulters who despite having sound financial health do not pay their loans back due to a lack of stringent measures.
  • Lack of Accountability and Transparency in Key Appointments:
    • The functions of the Banks Board Bureau are still not clear.
    • But it does not have the final say in key appointments.

Way ahead:

  • Thus, Banking sector in India has had multiple issues and is undergoing sea changes through timely reformsto further serve the goal of socio-economic development of India.
  • The RBI’s guidelines of 2018 advising banks to create an Investment Fluctuation Reserve is just the kind of countercyclical tool that has relatively insulated Indian lenders from interest rate risks.
  • Still, the RBI must remain on guard to ensure neither global contagion nor management missteps threaten any local lender