Issues and Challenges facing Indian Banking Sector
The article analyses the problems faced by the Indian banking sector especially Non Performing Assets and lists out the steps taken by the Government to remedy the situation.
Banks in India are considered to be the lifeline of the economy. They play a catalytic role in activating and sustaining economic growth. As per KPGM-CII report, India’s banking sector is expanding rapidly and has the potential to become the fifth largest banking industry in the world by 2020 and third largest by 2025.
Status of Banking Sector at a glance
• The Indian banking system consists of 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional rural banks, 1589 urban cooperative banks and 93550 rural cooperative banks.
• The Indian banking sector’s assets reached 1.8 trillion US dollars in 2014-15 from 1.3 trillion US dollars in 2010-11, with 70 per cent of it being accounted by the public sector.
• Total lending and deposits increased at a compound annual growth rate (CAGR) of 20.7 per cent and 19.7 per cent, respectively, between 2007 and 2014 and are further poised for growth, backed by demand for housing and personal finance.
• Indian Banks have successfully adopted the Basel II norms of international banking supervision and as per the Reserve Bank of India (RBI) majority of the banks have already met Basel III capital norms prior to its deadline of 31 March 2019.
Factors promoting growth of Banking Sector
• Emergence of Universal Banking System: Services provided by banks have expanded rapidly in the last decade. In addition to the traditional “savings and loans”, banks started providing a wide gamut of financial services like insurance, investment, asset management, etc which increased their in the economy.
• Through partnerships and acquisitions, banks are trying to integrate financial services, wallets, payments, shopping services etc., there by adding depth to their financial services.
• Economic growth: Over 9 percent GDP growth in the pre global financial crisis period (2009-10) and over 7 percent in the last two years largely facilitated the growth of this sector.
• Globalisation: As India is moving towards closer integration with the world economy, India’s merchandise trade, service exports and remittances are growing at a faster pace. In order to serve these ‘new needs’ banks have evolved and redeemed themselves in India and abroad.
• Policy initiatives: The Banking Laws (Amendment) Act, 2012 at the monetary front, and large scale infusion of funds into the public sector banks by the government in recent years fuelled the growth of this sector.
• For the government, the banking sector is at the core of governance. Initiatives like Jan Dhan Yojana and Direct Benefit Transfer are case in point.
• Usage of technology: Information and communication technologies including the mobile phones and internet connectivity are the prime reason for expanding the reach of banking sector to the youth and rural habitations.
Issues and Challenges
Amidst the signs of progress, the Indian banking sector has been facing multiple challenges in recent times. Few of them are -
Non Performing Assets
• NPAs have become a grave concern for the banking sector in couple of years and impacted credit delivery of banks to a great extent.
• As per a survey, net NPAs amount to only 2.36 percent of the total loans in the banking system. However, if restructured assets are taken into account, stressed assets account will be 10.9 percent of the total loans in the system. As per the International Monetary Fund (IMF), around 37 percent of the total debt in India is at risk.
• India’s largest lender State Bank of India (SBI) reported a massive 67 per cent fall in consolidated net profit at 1259.49 crore rupees in the third quarter of the 2015-16 financial year and classified loans worth 20692 crore rupees as having turned bad.
• As per an estimate, the cumulative gross NPAs of 24 listed public sector banks, including market leader SBI and its associates, stood at 393035 crore rupees as on 31 December 2015.
• The Economic Survey 2015-16 also alarmed the policy makers about growing bad debts with the banks and their potential to disrupt the growth prospects in the future.
• Reduced profits: The banking sector recorded slowdown in balance sheet growth for the fourth year in a row in 2015-16. Profitability remained depressed with the return on assets (RoA) continuing to linger below 1 percent. Further, though PSBs account for 72 percent of the total banking sector assets, in terms of profits it has only 42 percent share in overall profits.
Issue of Monetary Transmission
Like reduced profits, this is also an off-shoot of burgeoning NPAs in the system. With the easing of inflation and moderation in inflationary expectations, the RBI reduced the repo rate by 100 basis points between January and September 2015.
However, change in the key policy rate was not reflected in lending rates as banks are not willing to transmit the benefits of low interest policy regime due to low-availability of liquidity against the backdrop of high NPAs.
Scams in the erstwhile Global Trust Bank (GBT) and the Bank of Baroda show how few officials misuse the freedom they granted under the guise of liberalisation for their personal benefit. These scams have badly damaged the image of these banks and consequently there profitability.
Crisis in Management
Public-sector banks are seeing more employees retire these days. So, younger employees are replacing the elder, more-experienced employees. This, however, happens at junior levels.
As a result, there would be a virtual vacuum at the middle and senior level. The absence of middle management could lead to adverse impact on banks' decision making process.
Steps taken by Government and Banking Sector
To effectively address the above issues the Government including the RBI and the Supreme Court and the Banks themselves have taken many initiatives. Some of them are –
• 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 Union Government unveiled plans to infuse 70000 crore rupees in the next few years, but PSU banks would need at least 1.8 lakh crore rupees by 2019-20.
• In October 2015, the Government announced Mission Indradhanush under which 7 key strategies were proposed to reform public sector banks (PSBs).
• In May 2015, the RBI advised all PSBs to appoint internal Ombudsman to further boost the quality of customer service and to ensure that there is undivided attention to resolution of customer complaints in banks.
• The Government announced its intention to introduce a comprehensive Insolvency and Bankruptcy Bill in the Parliament based on the recommendations of the Dr T K Viswanathan-headed Bankruptcy Law Reforms Committee (BLRC).
• In order to rein in corruption, the Supreme Court on 23 February 2016 ruled that the top officials and employees of private banks will be considered as public servants for the purposes of the Prevention of Corruption Act, 1988.
• The RBI is also facilitating rectification of procedural flaws in the system through a number of well-thought-out initiatives like restricting incremental non-performing assets through early detection, monitoring, corrective action plans, shared information, disclosures, etc. In this regard, the RBI’s resolve to clean banks books by 2017 is commendable.
Banks are at the core of any economic system whether developed or developing. Essentially, a technologically advanced, transparent and efficient banking system is the need of the hour for the growing economy like India.
In our country, need for qualitative banking surpasses the conservative economic or financial logic as the financial inclusion is still a distant dream. In addition to the provision of traditional services, many social functions are attached to the banking system financial inclusion and inclusive growth.
In order to achieve the goal of faster and inclusive growth, it is high time the government and banking industry undertake a comprehensive relook into the existing policies and structures.
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