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Banking Goes For A Toss

Banking Goes For A Toss

At a time when some of us spend time by discussing the daily count of Covid-19 cases or watching movies and serials on Netflix, Hotstar, Apple and Amazon, a large number of our fellow Indians have lost their jobs. A big chunk of those at the base of the pyramid do not have access to even the basic necessity called food. The government has been quickly announcing unlock guidelines to kickstart the economy, despite the volcanic eruption of Covid cases. Its strategy of keeping the teeming millions locked down for close to three months has only brought in the worst kind of economic crisis.

Innovation, rethinking and reinventing of strategies are now the buzz words for both the for-profit and the not-for-profit sectors. Many of the private sector firms and voluntary organisations have been facing an existential crisis. Yet, has the government adopted any innovative strategy to start the restoration phase, except for coming up with a new set of guidelines every month?

This is exactly what the former RBI Governor Urjit Patel and Deputy Governor Viral Acharya mentioned in their recently released books about the banking sector. Just a few days before the lockdown was announced in March, Yes Bank had given the common man one of the biggest shocks.A few months before that, we saw a similar situation in the case of the PMC Bank in Maharashtra. Not to forget the infamous cases of Nirav Modi and Vijaya Mallya. Now the question is: What has the government learnt from this crisis? Or has it come up with a new strategy?

Recently, the media have raised questions on the way bad loans were suddenly written off, despite the fact that recovery proceedings were pending against both Nirav Modi and Vijaya Mallya. The general public came to know about this only when an RTI application was filed by one Saket Gokhale. The RBI’s response revealed that the banks have written off outstanding loans of top 50 wilful defaulters amounting to Rs. 68607 crore as on  September 30, 2019. All those claims that the government had been trying to bring back Nirav Modi and Vijaya Mallya seem frivolous after reading this. If the loans have already been written off, will these people pay back even if they are brought to India?

Coming back to Viral Acharya’s book, “Quest for restoring financial stability in India”, it reveals some behind-the-scenes information just like this RTI application. The book begins with a foreword written by Y V Reddy, former Governor of the RBI. The preface traces Acharya’s journey from the US to India and his urge for restoring financial stability in the Indian banking sector. He was very much aware of the kind of crisis the sector was into with one of the highest non-performing loans to assets ratio amongst the G20 nations. Brimming with confidence, he was all set to take the challenges head on.

 “I felt energised that if there were to be a meeting of minds on this issue with the RBI (which turned out to be the case), then I could help hit the ground running as soon as I reached Mini Street,” he writes. While sitting at the airport, he prepares a checklist manifesto for giving the Indian banking sector a “smooth ride”, instead of a “bumpy ride”. The list comprised only two points – (a) “Fix the health of the banking sector… with reforms such as change of ownership, recapitalisation, … timely recognition of losses …” (b) “Develop financial markets to improve the efficiency of capital allocation, reducing dependence on bank credit …”

However, the exciting journey is met with a lot of ups and downs. He had to struggle constantly to convince the powers that be, compromising on certain aspects and preparing his mind for achieving his vision. “We achieved moderate success in terms of fixing the health of the banking sector”, he states. The bank was able to put in certain systems in place for marking bank assets more accurately for the losses, introducing prompt corrective action (PCA) and resolution of non-performing assets as per the insolvency and bankruptcy code (IBC).

The next 10 months saw the worst. The weaker banks were given capital, rather than the healthier ones. The entire PCA framework was diluted and so was the case with the system for recognition of loss-bearing assets. IBC was put on hold. “The central bank came under intense pressure to open up liquidity and credit taps to prop up the economy,” Acharya laments. In the wake of “attempts to alter its governance structure”, the RBI lost its Governor on “the altar of financial stability”. What kept him awake at night were certain very pertinent questions like “why are efforts at restoring financial stability seen as contradictory to pursuing growth”. The book speaks volumes about the kind of interference that the apex bank faced after Raghuram Rajan’s exit and during the tenure of Urjit Patel. It resonates with what the mainstream media has been highlighting for the last few years. However, it seems that the vested interests of those who control the government have more say than those who promote fiscal prudence and financial stability.

Referring to the issues Japan faced in the 1990s due to its weak banking and financial sector, Acharya has warned the Indian government of blatant deficit financing. Considering the current Covid crisis, the bad loans are likely to mount to 12 to 15 per cent and deficit financing is bound to increase both fiscal deficit and current account deficit.

Urjit Patel’s book ‘Overdraft’ has no different story to tell. It sheds light on how different stakeholders – both official and private players - succeeded in defeating the original intent of THE IBC. Borrowers have been increasingly exploiting the loopholes and vagueness of some important provisions of the code. “If resolution outside the IBC is the preferred mode, then is the code a fifth wheel at best?” Patel writes. The over-dependence of the public sector banks on the government’s recapitalisation drive has worsened the situation. It is like inducing capital by borrowing or printing more money to fund the bad-loan crisis without even touching the root cause of the crisis. 

The rich and the influential will keep on borrowing money without making efforts to repay. The government will effortlessly write off the bad loans and infuse money by again borrowing or printing more money, increasing the fiscal deficit.

This vicious cycle will be never-ending unless the banks become self-sufficient, something Acharya had been trying to do during his tenure. Over the last three financial years, the government has infused Rs. 2.6 lakh crore into public sector banks. This is more than double the money that has been infused in the last nine years. Has it made the banking sector more effective by any means? The answer is no. Unless the government appreciates the corrective measures and gives independence to the central bank, there would be more Yes Banks and PMC Banks. And who will suffer? Certainly, the general public. They would be cash strapped for a few months without any access to their hard-earned money.

Then the government will again make an announcement of a recovery package, a la James Bond type, emerging as the real hero, acting as a saviour of the poor and the middle-class. No one bothers about the safety of your money.

As far as rethinking and reinventing is concerned, it seems there are no takers, at least in the government. 

 (The writer, a company secretary, can be reached at )

(Published on 03rd August 2020, Volume XXXII, Issue 32)