When the house is on fire and the situation looks hopeless, any maverick action can be sold as good. That is one way to look at the report of an internal working group of the RBI that has recommended that large corporate and industrial houses be allowed as promoters of banks. The recommendation has invited sharp and worrying reactions from two former RBI seniors who have quit and are back at their academic jobs – Raghuram Rajan and Viral Acharya. The recommendation says the change must be preceded by changes to the law to prevent "connected lending" and strengthen the supervisory mechanism, recognising that there are dangers but that new regulatory frameworks can mitigate them. In fact, the report itself notes: "It will no doubt be necessary to significantly scale up the supervision capacity before considering large corporate houses to promote banks", given the governance risks and conflicts of interest that could arise when large corporates, whose fuel is money for projects, also begin to run banks, whose job it is to lend money for projects.
In a line, the RBI group is telling us that banks can be run by corporate houses if supervision is good. Which begs the question: what is the quality of bank supervision in India and where has it landed us? Everyone knows the answer to that question. Indian banking is in the doldrums – of that there is little doubt.
Banking can be made to look like a complicated business when it is not. The basics of a bank are quite simple. The former deputy governor Viral Acharya once put it this way: "A bank should be something one can 'bank' upon." Quite simple are also the signals that the bank is not in good health. Look around the Indian banking scene and it should not be difficult to see signs of decay if not worse. India is not a banana republic, at least not yet. This is culturally also not a country known for reckless spends by ordinary citizens living today on bills that will have to be paid tomorrow. In fact, the ordinary depositor is a hefty saver, a loyal customer and a stickler for paying bills on time. It is this ordinary citizen's money that runs the bank. That is culturally the profile of the typical Indian customer at a bank counter. This profile is changing but the moorings and anchors are still there.
In this country of hardworking savers and careful buyers, the banking system runs with gross non-performing assets (GNPAs) that were reported at Rs. 7,39,541 crores for 2018-19, with Rs. 1,83,391 crores written off that year, according to the last RBI Trend and Progress of Banking in India report of December 2019. In its Financial Stability Report, the RBI noted that large borrowers accounted for over half of all loans given, and more than three-fourths (78.3 per cent) of GNPAs in March 2020. Both these shares have declined since March 2018, which might indicate that the disease is spreading to smaller borrowers slowly but surely. Numbers such as these are alarming, looked at from any perspective. For example, NPAs of Bank of Baroda rose more than six-fold to Rs. 73,140 crore and Indian Bank NPAs rose four-fold to Rs 32,561.26 crore in about six years, from 2014 to 2019, PTI reported in May. The recent story of Yes Bank is another saga of supervision gone bad. It looks like we were historically bad in supervision, we continue to be bad, and we want to relax some norms and plan for supervision that will magically turn good once rules are even more relaxed! Call it by whatever name, but this is logic that does not hold. It may indicate that a major change is coming and that the government is preparing for a new policy path that will carry significant ramifications and open new doors to guard at a time too many are open and left unguarded in the banking sector.
It is true that a lot of our problem of bad loans originated in the hey days of the rocket-like growth that the Manmohan Singh government gets credit for. We yearn for that growth even today, particularly because the current administration has only given us declines, self-inflicted like it was with demonetisation, and the "act of God", as the finance minister called it, in the case of the pandemic that continues to cause deaths and distress. Under these circumstances, the already bad situation of NPAs can only get worse, which raises even more alarm at the timing of the proposed changes and relaxations.
On NPAs itself, it is worth noting that despite having a political incentive to probe and bring to book anything that is separate from a genuine business failure, the current administration has been unable to send strong signals and hold any of the guilty to account. One must wonder at how a collapse of this monumental proportions can occur, even after taking into account explanations like a turn in the business cycle, or particular sectors not taking off, or that land acquisition failed or the courts issued stay orders. The fact remains that business plans have failed, wholesale, across sectors, and all at a similar time. Look again, and you'll hear stories of how businessmen were chased with loans offers, doled out as a mad rush to grow the loan book, never mind the norms, principles of oversight or end use. In this rush, how much of public money was pocketed and by whom is not something that the GDP growth celebrators have ever bothered about. Governance and sustainability and viability of growth was not considered topics glamorous enough to focus on.
India needs to crack the whip on this one. Instead we have had pussyfooting. The government ought to have gone after the defaulters to make an example of them in every case where the loan has gone bad for reasons other than a genuine business failure or delay. Instead, the government has gone after all kinds of enemies, political, imaginary and others, but failed to act on NPAs. It can be accused of going soft on big business. The Insolvency and Bankruptcy Code, IBC, is in place but in its infancy still; the strict deadline of 180 days to resolve or monetise whatever can be salvaged has rarely worked in India for a variety of reasons. And recoveries are at very low levels. Haircuts are high.
In sum, banking is about credibility, trust and building confidence and being held to account for any malicious the decisions the bank takes. None of this holds for our banking system – which has more banks and branches than we can handle. Bringing new banks with corporate connections and controls will not solve this problem but only exacerbate it. Yet, we must all prepare for the new Imperial Bank of India, in service of the modern-day versions of the East India Company.
(Jagdish Rattanani is a journalist and faculty member at SPJIMR) (Syndicate: The Billion )