Indian banking industry is loaded with the biggest piles ofbad loans after it witnessed huge corporate loans slipping into NPA (NonPerforming Asset) basket of banks. These bad loans put major players in thebanking industry on the brink of collapse. However, continuos engagement ofbanks to resolve the bad loan issue helped not to allow the situation going outof hand.
During its war on bad loans, the banking industry iswitnessing mergers and bailouts as key policy tools to clean up the burgeoningbad loans. And very recently, we witnessed merger of Dena Bank & VitayaBank into Bank of Baroda.
Consolidation of banks is seriously emerging as anappropriate means to pull the banking industry back on track. Researchers atthe Reserve Bank of India (RBI) have published a paper wherein they haveadvocated that ‘more consolidation in India’s struggling banking sector willhelp lenders lower costs and efficiently scale their operations.’ Theresearches have suggested that further avenues of consolidation in the bankingsphere may be explored.
The above snap shot of the RBI researchers’ findingsprecisely reveals that our banking industry continues to struggle to negotiatethe burden of non performing assets. Its consolidation through mergers andbailouts which is going to hold ground in future to see the struggling banksout of bad loan mess. It’s worth mentioning that the termite in bad loans is driving up thecost of capital and it makes a sense for the government, which is owner of thestate-run banks, to opt for mergers.
Under the given circumstance, the banks cannot afford tooverlook the problem and have to remain extra ordinarily focussed to wipe outthe very existence of the termite in bad loans. In simpler terms, burgeoningnon performing assets have put existence of banks at stake.
Even as government along with the RBI as regulator is engaged to pull the banking industry out of bad loan mess, there are certain areas where banks can be granted relief. For example, corporate social responsibility (CSR) spend by companies, including banks, is mandated through the statutory route of Companies Act 2013.
The Act envisages companies with at least Rs 5 crore net profit, or Rs 1,000 crore turnover or Rs 500 crore net worth to necessarily spend 2 per cent of their average annual net profit (profit before tax) on CSR activities in each financial year. The implementation of the Act started in the financial year 2014-15.
Giving a new facelift to the concept of CSR in the country through a statutory route is something which suits our societies.
Making the companies accountable on this front as far as their spend in social upliftment beyond their core business activities is concerned is also a step in right direction.
But putting this uniform CSR blanket on wide range of companies in varied sectors of economy needs a relook. What I mean to say is that mandatory part of the CSR rules should have been introduced with some flexibility in case of banks.
Overall health parameter of the sector where companies fall under the ambit of CSR rules makes a sense to be considered before making it mandatory for implementation.
As far as banking sector is concerned, mandating CSR spend needs reconsideration. The industry has been reeling under tremendous pressure for the past few years.
The most visible turmoil is in bad loans. Demonetization also played havoc with the industry. It not only subjected the human resources of the bank to innumerable hardships, but banks were forced to bear huge expenses to get the process of demonetization concluded.
Since the country is considered a bank-led economy and theeconomy not doing well, it makes sense to leave the banks out of the ambit ofCSR rules. Notably, few years back, the finance ministry had written to thecorporate affairs ministry, asking the latter to exempt banks from thecorporate-social responsibility (CSR) spending mandated by the Companies Act.
However, there’s another option. Let banks be allowed tointegrate the CSR spend into their corebusiness strategy. It’s pertinent to mention that the CSR rules don’t allow thecompanies to use CSR route for their core business activities. If the corporateaffairs ministry lends its support to the banks through any of the givenoptions, it would pull a layer of stress from the banks.
(The views are of the author & not that of the institution he works for)