Banking sector

Refer Credit

ES 2019-20
PSB Network (like GSTN) to collate information available across PSBs → process
loan applications faster and better

geo-tag collateral for immovable property, adding GPS tags to movable property
(need framework to balance privacy)

bank employees pressured from ex-post monitoring by CAG, CVC, CBI → unwilling
to take risks

paid flat salaries unlinked to bank's performance

Status
NPAs plateaued at ₹10L cr in March 18, declining since (86% NPAs belong to
PSBs)

4 banks still under PCA, down from 11

mega bank merger → 12 PSBs in total

regulation: RBI no longer owner, demands more control

Challenges
SBI only bank in top 100 globally; need 8 to become $5T economy by 2025 (ES
2019-20)

tech infra outdated, CBS-SWIFT linkage missing in banks (Nirav Modi LoU scam)

bank employees hesitant in lending (fear of harassment by investigative agencies),

limited incentive to work for bank's success (paid flat salaries)

govt ownership → political pressure to disburse loans, political kickback in loan

recovery

lack of transparency in accounting (Yes Bank hid excess exposure to single debtor)

Banking sector 1
 no insolvency proceeding for banks and FIs → perception of too-big-to-fail,
complacency and inefficiency

Reforms
BBB for capital raising strategy, apolitical appointments to management, overseeing
corporate gov

IndAS implementation deferred by a year due to legal delays

IndAS accounting standards in line with global best practices (IMF’s IFRS 9)

NBFCs have implemented, RRBs exempted

Basel 3 adoption by March 2023 (delayed due to COVID19)

stricter capital requirements in the form of CCB (RBI: issue non voting shares,
raise foreign funding to 49% from 20% etc)

monetary policy transmission: shift from BPLR to MCLR, moral suasion, NPA
resolution etc

external benchmark for MSME and personal loans: t-bill yield or repo rate

UCBs and multi-state cooperative banks under RBI supervision now: SAF
introduced

SFB license on tap for paid-up capital of ₹200cr

NPA resolution: recognition, periodic recapitalisation, IBC for timely resolutions

PCA

large scale consolidation of PSBs to 12: economies of scale, greater risk appetite
(in line with Narasimham guidelines)

PCR in works (YMD)

What else to do?

bail-in/resolution plan to allow inefficient banks to exit, with safeguards to address
depositors' concerns

infuse freed up capital into well functioning banks (Raghuram Rajan)

Banking sector 2
 PCA
bank health indicator: capital (CRAR), asset quality (net NPAs ratio) and profitability
(return on assets)

mandatory actions: restriction on dividend/profits distribution, branch expansion,

management compensation and director’s fees, higher provisioning norms

discretionary actions: strategy, operations, HR, capital, market risk, credit risk
related etc

YesBank didn’t violate PCA criteria despite poor financial situation -> need to
review?

4/12 banks under PCA in 2020 (down from 11 earlier)

NABARD extended PCA to RRBs; RBI's Supervisory Action Framework for UCBs

PSB Merger
27 banks merged into 12 (in line with Narasimham committee)

large banks higher on performance, scope for more mergers in Indian banking
sector (RBI report)

benefits:

larger banks have cheaper borrowing costs, regulatory compliance costs

greater risk diversification within banks

can afford to invest in emerging technologies; larger database in single place →

improved risk assessment and loan approval

can lend for larger and longer gestation projects (crucial for emerging economy
like India)

more competitive on international and national stage (ES 2018-19: India needs
8 banks in top 100, currently only SBI)

monitoring easier as number of banks declines

challenges:

reconciling differences in technology, balance sheets, culture and values etc,

Banking sector 3
 reorganise bank branches to remove duplicity → fears of people being let go,

can create too-big-to-fail perception and promote laxness in functioning

operational redundancies to be resolved: duplicate branches, ATMs etc

Financial inclusion
status:

80% have bank accounts but many inactive

50% don’t avail formal credit access

causes of exclusion:

low family income, lack of surplus income; lack of assets to collateralise for
bank loan, lack of credit history

lack of trust in system

lack of awareness about financial services or how to avail them

traditionally bound under informal credit or bonded labour

lack of institutions in vicinity, low digital literacy

lack of documents to avail services

lack of products tailored to their demands (eg: micro-insurance); high

transaction costs

initiatives:

PMJDY: 30 cr+ no frills bank accounts opened; RuPay debit card, insurance

Swabhiman scheme; IPPB: leverage post office network and reach of postmen
for doorstep delivery of financial services

payment banks: savings account and money transfer, but no credit access

SFBs: license on tap; seen greater credit disbursements and deposits (RBI)

NBFCs

Kisan Credit Card, MUDRA, MSME loan portal, interest subvention schemes
etc

Banking sector 4
 leverage technology: micro ATMs for the unbanked

UBI

RBI released National Strategy for Financial Inclusion for next 5y:

financial awareness and literacy

last mile delivery of banking services

insurance and pension schemes for those enrolled under PMJDY

use of technology (eg: financial service provider accessible via phones),

innovative payment mechanisms (eg: UPI)

monitoring and assessment

Other reforms
RBI wants greater control over PSBs; GoI: has a nominee to board, representation
on bank's loan approval committee

Nationalisation of banks
1950s ???, 1967, 1980

significance:

public faith → savings

reduce connected lending (banks connected to large corporate houses)

RBI regulation of banks

govt can bail out if needed → stable banking sector

increased credit flow to agriculture, MSMEs (PSL etc)

improved financial inclusion through branches in remote areas

challenges:

administrative and political interventions

complacency (govt would bail out)

compromised efficiency and profitability

Banking sector 5
 NPA rise (loans with limited due dilligence)

Banking sector 6