Cleaning The Augean Stables
Is the worst over for our banks?
Mint Road's latest Financial Stability Report (December 2016) says gross dud-loans were up at 9.1 per cent from 7.8 per cent between March and September 2016; the overall stressed advances ratio stood at 12.3 per cent (11.5 per cent). Now flashback to the FSR of December'2014 when these numbers (for a like period) stood at 4.5 per cent (4.1 per cent); and 10.7 per cent (10 per cent). You will be tempted to say we are worse off now -- you are wrong.
The figures look the way they do because during the decade-old Congress-led UPA regime you could laugh all the way to the bank -- the worldview in vague then was it's against my principle to pay interest on the loan I took; and against my interest to repay the principal.
The party-pooper was Prime Minister Narendra Modi who took away the punchbowl.
Detox Is Painful
Banks' have pressed the "pause" button on the asset-side as they clean up dud-loans and pressure on capital holds sway.
A key move was the asset quality review (AQR) of banks during fiscal' to tackle dud-loans. It brought to the fore huge variance in the reported levels of impaired loans and the actual position. It was meant as a rap on the knuckle of bankers to tackle asset quality concerns in a proactive manner in the medium- to long-term, but it (AQR) had an "adverse" impact on banks' bottomline in the short-term as it led to an uptick in the funds set aside to provision for them by banks.
To stop the credit-binge which lead to dud-loan pile in the first instance, you saw the `Large Exposures Framework' (1 December 2016) to limit banks' exposure to a single counter-party or a group of connected counter-parties. Along with a complementary framework to discourage large borrowers to depend solely on banks for their funding needs to contain concentration risks for the banking system.
It's a key reason why credit growth fell to a six-decade low of 5.08 per cent in fiscal'17 (10.7 per cent) as bankers took the cue to go easy on credit - not that they needed a prod! And what you now see play out is nothing, but what's called "narrow banking" wherein you go easy on book growth. It's entirely desirable given the current health of our banks. Also look at the brighter side of it - the economy continues to chug along at seven per cent thereabouts even with this sluggish growth in bank credit. It can only mean that when banks finally wipe their dirty slates clean you will see a better dawn. Of course, it will be sometime before the pot-holes of the UPA decade get filled up.
You need to laud the Centre's "Indradhanush" (rainbow) package to reinvigorate state-run banks which account for nearly 70 per cent of systemic assets (its sure to fall hugely as we go along). While you can quibble the blue-print for much of this had been drawn up during the Congress-led reign at the Centre, three years on it's clear as daylight the Modi-led dispensation has got a large part of its banking act spot on.
What's even more creditable is it's gone beyond matters credit and set banks on the path to tomorrows' world - a digital one.
Now it's easy to be held hostage by the debate over demonitisation. But to the extent you don't have a precedent of its kind anywhere on this planet, all the punditry over its merits and demerits is to be taken with a big bagful of salt.
What you can't get away from is digital is the way forward. New-age payment modes like Bharat QR, BHIM, Aadhar-enabled payment systems and UPI are great initiatives and will give a huge leg-up to digital payments. Over the year, you saw 1.5 million point-of-sale units being set up -- the bulk of it due to demonetisation. We have more than a 100 million debits-cards, yet lag China and Singapore in terms of digital payments. In line with Mint Road's 'Payment and Settlement Systems in India: Vision 2018,' the payment infrastructure is in for a tweak to better lead to the five Cs -- coverage, convenience, confidence, convergence and cost.
To conclude, few bankers will contest Modi is much like Plutus -- the Greek God of Wealth -- who was blinded by Zeus so that he would be able to dispense his gifts without prejudice; that's what his dispensation at the Centre aspired to do anyway (blinded or not) in the summer of 2014.
If the banking system is left in a better shape come 2019, it will also prove another thing - Modi is as good as the other "Doctor" in New Delhi!
