How Modi Has Got His Banking Reforms Mostly Right

<div><em><strong>Raghu Mohan </strong>says NDA under Prime Minister Narendra Modi has got large parts of its banking act spot on</em><br><br><br>Open the Bharatiya Janata Party’s (BJP) manifesto for the May 2014 Lok Sabha elections, and you come across this bit on matters Plutus. That well before the British landed on our shores, we had “a well-developed banking system and equally renowned businessmen, along with its financiers, who were contributing to create a flourishing and progressive economy”. &nbsp;It may be Greek to refer to Plutus in a stock-taking on the BJP-led National Democratic Alliance (NDA) dispensation. But like the Greek God of Wealth who, blinded by Zeus, was able to dispense his gifts without prejudice, that’s what this dispensation aspired to anyway (blinded or not).</div><div>&nbsp;</div><div>Fifteen months on, it’s clear that the NDA under Prime Minister Narendra Modi has got large parts of its banking act spot on. You can quibble that the blue-print for much of this had been drawn up by the previous regime headed by Manmohan Singh, but it will only distract us from parts of act which have not been spot on.</div><div>&nbsp;</div><div><strong>The hits…</strong></div><div>&nbsp;</div><div><strong>An unqualified success is the Pradhan Mantri Jan-Dhan Yojana (PMJDY)</strong>. It’s not an original idea; the business correspondent-led banking model under Singh’s had got the concept right, but execution was far from good. And five months after its launch (or relaunch!) in August 2014, PMJDY made to the Guinness Book of World Records in terms of the number of bank accounts opened. North Block’s figures puts deposits under PMJDY at Rs 22,647 crore (19th August 2015); zero-balance accounts have dipped to 46.93 per cent to July 2015 from 76 per cent from September 2014. “The number of accounts grew by a whopping 27 per cent in 2014-15. This unprecedented and extraordinary development comes as a giant leap for banking in the country”, says Saurabh Tripathi, Partner &amp; Director at the Boston Consulting Group. If the government can build on this -- and also plug leakages in annual subsidy transfers in excess of Rs 50,000 crore to PMJDY beneficiaries -- it would have scored a real winner. Early indications are, it will.</div><div>&nbsp;</div><div><strong>On to the use of mobile telephony and e-banking to ensure financial inclusion</strong>. The Reserve Bank of India has granted ‘in-principle’ approval to 11 entities. Just how this pans out operationally remains to be seen, but there’s nothing to “judge” in this case. It was mere licensing unlike the PMJDY where the government decided to grease the wheel rather than reinvent it. The idea of payment banks was flagged off by Mint Road on 27 August 2013 in a policy discussion paper on `Banking Structure in India: The Way Forward”. It was picked up by the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (Chairman: Dr Nachiket Mor) which in its report (January 2014) to make a case for payment banks.</div><div>&nbsp;</div><div>But it’s an idea whose time has come. As Pawan Agrawal, Chief Analytical Officer-CRISIL says: “There could be a positive rub-off on existing banks partnering with payments banks through increased access to unbanked and under-banked areas in a cost-efficient manner. Bank credit to GDP in the east, north-east and central India is less than 60 per cent compared with 77 per cent for all-India”.</div><div>&nbsp;</div><div><strong>It leads us to those who have money in banks which they can’t account for! Or black money</strong>. While the BJP did say in its manifesto that “by minimising the scope for corruption, we will ensure minimisation of the generation of black money”; that it “is committed to initiate the process of tracking down and bringing back black money stashed in foreign banks and offshore accounts” -- the reality is that it’s not as easy as going over to your friendly neighbourhood bank manager to help you sort out a problem. Should we be harsh on the government over its efforts to bring back the loot? No. The rhetoric of black money and jibes at the Gandhi family makes perfect sense on the campaign trail; it makes for good media copy. And you can’t fault the BJP for using it. But credit must be given to the dispensation that it not only stoked a debate on the subject, but has also taken the baby steps -- what’s realistically possible -- on it.</div><div>&nbsp;</div><div><strong>… And the nearly so</strong></div><div>&nbsp;</div><div>If the backbone of an economy are its banks, this one was nearly broken on account of non-performing assets (NPAs). In its manifesto, it said “NPAs have increased sharply over the past few years and the trend continues. BJP will take necessary steps to reduce NPAs in banking sector”. Truth be told there are no quick-fixes here.</div><div>&nbsp;</div><div>Mint Road’s Financial Stability Report (June 2015) observed that while risks to the banking sector had moderated marginally since September 2014, concerns remain over the continued weakness in asset quality indicated by the rising trend in bank’s stressed advances ratio. Gross NPAs went up to 4.6 per cent from 4.5 per cent between September 2014 and March 2015. So too restructured standard to 11.1 per cent (10.7 per cent). State-run banks recorded the highest level of stressed assets at 13.5 per cent of total advances as of March 2015. The net NPAs of banks remained unchanged at 2.5 per cent during September 2014 and March 2015.</div><div>&nbsp;</div><div>The FSR was of the view that the current deterioration may continue for few more quarters. That falling profit margins and debt repayment capabilities of India Inc add to these concerns though the overall leverage level in Indian economy is comfortable when compared to other jurisdictions. What’s heart-warming is that it has acted on the FSR’s suggestion that “in this context, the policy initiatives for improving the governance and management processes at public sector banks become significant”. The seven-point “Indradhanush” programme to improve the working of these banks is a welcome step. So too the step towards recapitalising these banks ahead of Basel-III capital adequacy norms which kick in from fiscal 2019 which will need about Rs 2,50,000 crore in core equity. Is this enough?</div><div>&nbsp;</div><div>While adequate capital has been provided for now, it may be not be enough if one goes by the FSR’s warning that bank asset quality may fall for a few more quarters. That’s because of the Rs 25,000 crore allocated in the current fiscal year, more than Rs 20,000 crore will be pumped in the coming months; the remaining is to be released based on the performance of the banks. “We believe that a lot of the capital would also go towards higher provisioning in the current fiscal”. Says Kaitav Shah, analyst at SBI Cap Securities. Given the state of the fisc, finance minister Arun Jaitely may well soon find that this genie will not go back into the bottle anytime soon.</div><div>&nbsp;</div><div>What’s one to make of the story so far? Well, Plutus is also lame; takes his time to arrive and winged as he is, leaves faster than he comes. And when his sight is restored, he’s able to determine who deserves his attention; he then wreaks havoc!</div><div>&nbsp;</div><div><strong>Modi’s Reforms In A Logjam; Read Businessworld magazine 24 September Edition&nbsp;</strong></div>