How populism triumphs over urge to reform banking industry
Contrary to the expectations, Modi government has clearly sidelined the 'big bank' reforms.
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This Diwali, Indian banks must have prayed more for protection from government's populism, rather than prosperity. The fact is on Dhanteras, when Prime Minister Narendra Modi assigned the government's gold monetisation scheme to beleaguered banks, the banking industry was already reeling under stressed loans and insipid credit growth. As banks struggled with lower profits, it was not their core business of lending, but other incomes like sale of investments in bond and equity markets that saved their bottom line. Even a lay person, let alone a clued-in investor, will wonder how a government can experiment with populism at a time banks are inching towards a crisis.
Banking reforms were thought to be the first priority for the new government. Indian banks expected not only a pragmatic management of bad loans (NPAs - Non-Profitable Assets) but also a long-term plan for structural reset and privatisation in order to match global banking standards. Contrary to the expectations of "big bank" reforms, the Modi government came up with populist schemes like the Pradhan Mantri Jan Dhan Yojana (PMJDY), the MUDRA Bank and the gold monetisation schemes.
For Jan Dhan Yojana to become a success, a pre-defined plan should have been laid out for banks to handle expanded banking reach efficiently. Forcing them to meet bank account targets was not just unviable but unwise. In addition, the scheme was instituted at a time when there were no takers for loans and the deposit growth rate was the lowest in 51 years.
Consequently, banks displayed extreme reluctance to provide overdraft facility on Jan Dhan accounts, owing to repayment concerns. That has forced the Reserve Bank of India to include Jan Dhan overdrafts in priority sector lending targets. After continual nudging by the government, banks disbursed Rs 11,825 lakh to 8.37 lakh account holders under the scheme as of October 30. Of the total of 19.13 crore accounts opened under the PMJDY since August 2014, the overdraft facility is now available in 43.31 lakh accounts, according to finance ministry.
The story is the same when it comes to contribution of insurance schemes (jan suraksha) through the banking channel. Public sector banks had been prodded to increase enrolments (not insurance). According to latest government data, public sector banks (PSBs) enrolled a large number of subscribers. However, six months after its formal launch, the flagship pension scheme for the unorganised sector, the Atal Pension Yojana (APY) managed only ten lakh enrolment (not insurance) by the end of October, against the target enrolling of two crore subscribers by year-end.
Distribution of collateral-free loans via MUDRA Bank, third major populist initiative, was also loaded on the banking industry. Mudra bank's loan camps, a redux of loan melas of 80's, has failed to enthuse banking industry, obviously not in a position to offer free lunches.
In spite of a high profile launch, banks are likely to go slow on gold monetisation schemes as gold prices are prone to volatility. According to Reserve Bank directives, banks can give an interest of maximum 2 to 2.5 per cent on gold deposits for three to five years. The meagre interest rate on gold deposits is enough to deter people from going for it. The latest data that only 400gm of gold was monetised in the fortnight after launch of gold deposit scheme, corroborates the conclusion that scheme has failed to bring out gold lying idle with households.
All these schemes are reminiscent of the 1970-80s decade when governments used banks for populist politics in the guise of social banking. In fact, Indian banks could be better described as crony banks with a nexus between corporates and banks. The worst aspect of bad loans of banks is that these loans are not pending against small entrepreneurs, and consumers, but select industrialists.
According to a new report of Credit Suisse, 17 per cent of the loans advanced by Indian banks are in trouble. This estimate is larger than the Reserve Bank's initial estimates (11 per cent). The report says that India's ten large industrial groups collectively owe $113 billion. These loans have throttled banks' capabilities and forced them to keep their interest rates high while the economy is starved of credit. It is highly disappointing that contrary to hopes of reforms and cleaning the crony banking mess, banks are going to get a capital of Rs 700 billion from tax payers' money, that is, from the budget.
As the government approaches its third Budget with no "big bank" reforms in sight, one can't blame the UPA government for the mess in the banking system. The Modi government has only accelerated the slide of banks towards the abyss, instead of halting it.