By Brajesh Kumar Tiwari
In the last parliamentary session, the Union Cabinet authorized changes (Deposit Insurance and Credit Guarantee Company Bill 2021) to deposit insurance laws in order to provide funds up to ‘to Rs 5 lakh to an account holder within 90 days in the event that a bank falls under the moratorium imposed by the RBI. The government also authorized an immediate increase in the deposit insurance premium of 20 percent and up to 50 percent.
The Indian banking sector is a resilient, sufficiently capitalized and well-regulated segment. Over the past 7 years, the NDA government has injected capital into public sector banks using recapitalization bonds. However, following COVID and the expectations of the 2021-22 Union budget, liquidity has become a huge problem. In recent years, several European banks have confirmed certain operations to transfer bad debts. This has largely contributed to a significant reduction in the ratio of NPLs. However, the birth of a huge secondary market for bad loans and the unification of standardized assets with big titles to build a “one-size-fits-all” portfolio has given way to more recent problems. In fact, the banking sector vacillates silently with the challenges it faces, namely:
Maintaining capital adequacy: The capital that a bank sets aside for its rainy days or to undertake lending activities acts more as the bank’s risk threshold. However, in the post-COVID world, banks are facing yet another ambush by NPAs over unsecured loans. Previously, the RBI proposed a moratorium on loans and also announced the two-year restructuring of loans to protect weak borrowers, but this situation points to a 7.5% increase in NPAs in September of last year to 13.5% in September this year, putting a lot of stress on the banks. Unless the government injects money outwards, the banks will suffer heavy losses, which will create huge capital adequacy problems. Bad debts and failing to maintain the minimum capital adequacy ratio prescribed by the RBI, banks will face serious challenges in due course. In addition, the Basel IV standards which limit the reduction of capital should be formalized in January 2023. Previously, following the global financial crisis of 2007-08, the international implementation of Basel III was formalized and this has already increased the solvency quotient for banks to mitigate risk. Now, Basel IV, according to global banks, will raise the capital bar even further, which is certainly a sign of concern for India given its current state.
Maintaining the quality of assets: Bad debts are a big problem for the Indian banking industry, especially PSBs. According to an IMF report, 36.9% of India’s total debt is at risk and banks have the capacity to absorb only 7.9% of losses. Add to that the COVID crisis and banks are struggling to recover loans from small businesses, which have been hit hard by COVID. The pandemic has brought activity to a halt across the board, so loan collection is a big question mark, definitely hurting the banking industry as it struggles to maintain the quality of its assets.
Maintain growth: The country’s overall economic growth is currently slowing and a push outward can only help all contributing sectors of the economy – business, retail and rural areas prominently. The impetus for growth is financial for now and the sooner the sectors recover, the better for the banking sector. For now, the banking sector has no way of meeting its growth aspirations and is barely staying on the ground.
With these top 3 challenges in mind, here are some suggestions for banking industry in India that will help them revive their status.
Things to work on in the short term
- Restructuring: The RBI’s restructuring guidelines on personal and business loans not only work as a relief for borrowers, but they also give banks an opportunity to maintain their status quo. Banks should take advantage of this relief period to improve the quality of their assets while continuing to be a pillar of support for MSMEs. This restructuring is advised by the RBI and the framework with the benefit of banks and customers in mind was specially designed and came into effect on April 1, 2021. As regulatory guidelines for loan restructuring are led by the RBI, so that the implications of customer late payments will not be badly felt by banks. This gives financial institutions a chance to reorient themselves.
- Falling Interest Rates on Loans: The COVID crisis has caused the economy to derail and financial shortages are an obvious problem everywhere. Constant cash flow is a problem for both the service industry and individuals. The Indian banking sector should use this premise to its credit and start offering loans at lower interest rates to individuals and MSMEs. This will encourage lending, which will boost overall economic growth and give banks a chance to improve their RCA. Reform has already started in the area of mortgage financing, with mortgage interest rates in India currently falling to historically low levels. What was around 8.40% in September 2019 is now in the 6.49-6.95% range.
- Improved due diligence: While it is necessary to pump more money into the system to help support businesses and stimulate the economy, there is also a need to keep bad debts at bay. Bad debt results in higher NPAs over time, which is why due diligence should be observed when offering funds. This will help keep frauds and unscrupulous people at bay and then banks will be able to grant money to legitimate and needy businesses or individuals. Careful scrutiny and strict enforcement will help prevent wrongdoing. In addition, banks should be careful when granting loans to Indian companies that have borrowed heavily from overseas. Indeed, according to RBI, this will expose banks to unnecessary dollar exposure and add further to their existing pool of problems.
Things to work on for the long haul
- Technological upgrade: digitization is the buzzword for businesses and banks, especially PSBs should adapt to the concept of digital to make banking operation transparent. Technology will make or break the way people view services in the times to come, so banks should take the bus before it leaves the stop. From adding cutting edge technology to upgrading services to upgrading the existing configuration, there are many opportunities that lie in the technology and harnessing it will help bring about a big change. in the approaches.
- Reach of technology: Technological inclusion and literacy campaigns should be undertaken to ensure that paperless banking or basic technology services are so easy to use that they are available / accessible and usable by all. It cannot be canceled. If people can order products from Amazon, use Facebook, why not banking. Of course, with proper security measures in place.
- Focus on MSMEs: Banks, including PSUs, mainly focus their attention on retail or corporate advances today. The banking sector mainly chooses to ignore the advances of MSMEs. This trend is not healthy for the economy and will not help banks to grow in the days to come. MSMEs are the backbone of India’s economy and create jobs for 70 million people. This sector has a contribution of 16% to India’s GDP, which according to reports is expected to grow to 25% by 2022. Certainly, the prosperity and growth of this sector will help to take advantage of the economy and give it prosperous enrichment. .
- Customer-centric innovation: Innovation is the key to customer retention today, and in order to secure long-term customer loyalty, banks should focus more on innovation. To keep pace with the changing environment and other industry practices, the banking industry should invest in innovation that will help it serve its customers with ease. The more agile the banking services and practices, the easier it will be for the customer to do banking transactions with the partner.
The pandemic has been a revelation to everyone in one way or another. However, counting in the positives of the pandemic, there is a chance to revamp the economy. Now is the right time to mend and reorient as we prepare for a brighter future.
(Brajesh Kumar Tiwari is the author of the book “Changing Scenario of Indian Banking Industry”; Associate Professor Atal Bihari Vajpayee School of Management & Entrepreneurship (ABV-SME); Member (Innovation Council, JNU); Jawaharlal Nehru University (JNU). Views expressed are those of the author.)