CRISIS OR NO
CRISIS
The Day of Bank Nationalization in India
passed off on Sunday. Smiles were kept years behind. None talk of village
adoption scheme; no Chairman would go to a village these days to see how their
rural branches are helping the farmers or the MSME is financed. No pride in
ownership. No regret for bad governance.
But for a full page pull-out by the All India
Bank Employees’ Association on the 20th July, 2020, who remembers
the Nationalization Day? Neither the employees, nor the disappointed customers
that include even the Banks’ own pensioners, nor those seeking credit from them
recall the Day. People are only alert on wearing masks and spiriting their
palms before handling the currency received from outsiders. Everyone cries wolf
on the ever-bulging non-performing assets. The only solid reform that we boast
of is the Insolvency and Bankruptcy Code. Job creation is hurt badly in the
organized sector with near-65% of MSMEs shutting their windows in pandemic.
Their markets are yet to revive.
Banks in UK, Iceland, and even the US
resorted to the most criticized and least preferred route of nationalization of
banks, when they confronted a crisis. The then OBAMA initiative that received positive
response of stock markets since the announcement of Toxic Loan basket takeover
under a joint Government-Private Fund, was however inadequate to retrofit the
lost confidence in the financial system.
The revival of ‘protectionist’ actions
would seem to be asserting more in finance than in trade. While the regulators of G-20 would be meeting
at the shortly, global regulatory regime has serious limitations and they should
be realigned with domestic regulations that have compulsive cultural characteristics.
Events so far have proved beyond doubt
that a global regulatory regime would not be able to provide appropriate solutions
to the type of recession that had set in due to pandemic. No prediction as to
when it would end. Annual Balance Sheets for 2020 are waiting for finalization
in several institutions. Basel III may have introduced a modicum of discipline
and uniformity in risk discipline among Banks globally. Several regulators
sought more flexibility. It is important for India to realize its distinction
in the emerging economic scenario and how necessary it is to turn the head on
the screws.
At the commencement of Covid attack,
India did well and even till now, we do not find people scrambling for food
because farmer and rural India stood by the nation. The biggest blunder of the system is more
announcements than actions and imperfect monitoring and undependable
statistics. All the rating agencies, IMF and World Bank kept the ratings low
and estimated growth of 42% in 2021. Opening the economy with lot of courage
has not been taken too kindly by Corona that has been surging every day crossing
the 10lakh persons. India took the 4th rank in the world in Corona affected
nations.
Second, we have the key sectors like
Steel, Zinc, other Metals and Coal as also the transportation system largely in
the public sector. We entered the Commodity markets and derivative markets in our
anxiety to mix with the globe. WTO is almost nearing collapse with most countries
choosing to adopt policies that secure their own nations and people, not caring
so much for the global discipline.
Third, there was no demand recession of
the magnitude that the other countries in the globe faced. Still the rural areas where still 65 percent
of our population lives, drive the demand growth. Having said that some facts that can be
hardly ignored: there is a steep decline in job growth; steep declines have
also set in the private sector trumped up by the global recession; the urban
and metro retail chains took a severe beating; the real estate and housing boom
that irrationally stepped up land values across the country took the first
heat-stroke and with them, the dependent MSME sector that is seen as the engine
of growth.
Fourth, Banks that lent heavily for the
retail sector and real estate sector started facing the continuous decline in
their performing assets. They lost
confidence in the resurgence of the demand and the productive capacities of the
manufacturing sector. Most public sector
banks even, refused to go with the RBI to pump credit.
Atma Nirbhar Bharat Abhiyan, the stimuli
announced to combat Covid-19, injecting more than Rs.20lakh liquidity, still
face risk aversion from the Banks. This high liquidity released only moved to
the investments in treasury instruments and to quote Subba Rao, former
Governor, gave confidence to depositors in the Banking system that their monies
are safe with the Banks, notwithstanding PMC Bank resolution still waiting at
the doors of the RBI. It has two windows: one, investments and the other
credit. The latest report on Investments not withstanding the $10mn investment announced
by Google, all the investment projects are reported to be lagging behind and the
cost over-run of the projects already swallowed the entire incentive package.
MSMEs are yet to come out of the two
shocks of demonetization and GST. After the redefinition, and after a host of
digital platforms placed within their reach, the access to credit by all counts
is a poor show. Out of the National Credit Guarantee Trust linked credit
incentive to the standard assets, Banks disbursed only 50% or less. This was
supposed to be automatic release of 20% additional working capital. The second
window to the stressed assets through Sub-ordinated debt is yet to open as the
operating instructions were received only a few weeks back.
SIZE – AN IRRATIONAL
CONCERN
Merger of PSBs taken up while the
economy was slowing down is yet to show up the results. The market value of the
SBI post-merger is way behind its peer, HDFC in the private sector. Sanctioning
Rs.1200cr to a known defaulter in its books and erstwhile chronic NPA resolving
through IBC, does not hold SBI in any high esteem either among global peers or its
own clients. Government of India, by merging PSBs to 10 from 28 did not gain
either in image or confidence of the people. Several clients say that
corruption has become endemic in PSBs and not even acknowledging a complaint,
or a letter of customer is so habitual that the latter are in the lurch.
While the Government’s efforts to
digitize the delivery system have borne fruits reasonably going by the way the MNREG
wages and other direct benefits reached the intended groups during the last two
years, financial inclusion is way behind. The reach of banks to the poor has
declined.
Regulator’s job is to make sure that the
vertical and horizontal growth of institutions should not be allowed to go with
a feeling that because of their size they are insulated from collapse and that
the Government and regulator had to do something to keep them afloat even in
the worst event like bankruptcy. This is
where the RBI should reformulate its views and ensure that the organizational
structures irrespective of their affiliations do not overboard the governance
and do not oversize.
The silos-based regulatory system
currently in vogue, with the RBI regulating Banks and NBFCs, Stock Markets by
the SEBI, Pensions by the Pension Fund Regulatory Development Authority,
Insurance by the Insurance Regulatory Development Authority, and Commodity
Futures by the Futures Market Commission should be effectively brought under
Financial Services Regulatory Authority. Department of Financial Services,
Union Ministry of Finance may have persons of eminence but when it comes to
examining micro issues for macro management, it left lot to deliver. Collective
wisdom needs to emerge to improve financial regulation and governance that
affects 130bn people does not brook delay.
India, for example does not have credit
risk insurance of the order prevailing in either Italy, or Germany or South
Africa. The Credit Guarantee Trust for
Micro and Small Enterprises is but a poor cousin of the trade and credit risk.
Credit Risk could not be introduced in India
Percy Mistry Committee called for a
unified regulatory architecture for resolving issues dealing with segmentation
of financial markets into banking, capital markets, insurance, pensions,
derivatives etc. Sweden , Singapore , UAE , UK , Republic
of Korea
OPERATIONAL ISSSUES:
Warren Buffet, the most reputed
investor, is quoted at number of places: “Derivatives were financial weapons of
mass destruction, carrying dangers that, while now latent, are potentially
lethal.” Over-the-counter derivatives that are off-balance sheet instruments
come to surface suddenly when their collaterals fall and when their values
become riskier to hold, killing in one stroke rest of the healthy assets of the
Banks. The delivery and recipient systems have not reached a level of maturity
to play with them, even a decade after their active entry. Indian financial system cannot afford the
consequences of systemic risks arising from their instrumentality.
Let me go to the most familiar area –
Credit Risk that is mostly understood as risk of default. Here the risks arising from asymmetric
information have not been dealt with. The Credit Information Bureau India
Ltd.,(CIBIL) is the only institution that currently unfolds client’s historic
information at price. Entry of multiple players with the enactment
of Credit Information Services Act of 2005 is put on hold. Trade and Credit information services should
enter the competitive domain for the information system to get into a semblance
of order.
Credit rating agencies in India that are
approved by the RBI are none other than the Fitch, Standard and Poor, Moodys
etc., whose ratings busted on the threshold of sub-prime crisis and beyond. There is no proof that they are doing their
job differently. Until the rating
agencies’ services are paid for by the financing institutions that make use of
the ratings and hold them accountable for the ratings, there is no guarantee
that the ratings per se would add to the quality of the credit portfolio the
banks carry in respect of the rated assets.
While the Government and the RBI,
Insurance and Capital Market regulatory authorities have proved one-upmanship
over the other regulatory authorities in reasonably insulating the Indian
Financial System from the impacts of the current global crisis, a large gap remains
in what is needed to be done. The time to put things in the right shape is now
and right away.
It is high time to appoint a High-level
Committee that should also include outside experts to clean up the banking
system with an open mind.
------------------------------------------------------------------------------------------------------------*The
Author is an Economist with three decades of banking experience and a Risk
Management Specialist He can be reached at yerramr@gmail.com
The views are author’s own.
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