Early this month, the Ministry of Finance at the initiative of the Prime Minister Mr. Narendra Modi held the novel Bankers’ Retreat (Gyan Sangam) in the sedate city of Pune, bringing bankers and insurers and other stakeholders in the financial sector for a meeting of minds to thrash out issues that stymie the PSBs in particular. After the get-together, a terse communication from the Finance Ministry to banks impressed on them the need to ignore “extraneous considerations in commercial decisions”. This path-breaking and resolute direction to banks could not be feasible without a wrinkle from the Prime Minister himself when he told the Gyan Sangam audience in unambiguous terms that the government would not interfere in the functioning of public sector banks and they should shed their “lazy banking” attitude, a smug practice to park funds in safe haven securities including government bonds instead of taking plausible risks by providing credit to the real sectors of the economy for driving development and generating gainful employment.

That the Finance Ministry and the Reserve Bank of India, the banking industry regulator and the country’s central bank, enjoyed a relationship that caused them to keep a decent distance from each other ceremoniously but letting them also air their respective dissent in public was seldom lost sight of! But for all the rate cut chorus made by trade and industry that was snidely supported by the Finance Ministers, the RBI in recent years did not see merit in listening to the lachrymose litany with the inflation demon remaining a major threat to the macroeconomic stability. For once, the NDA government in its second coming after a decadal chasm saw justifiable reason in the apex bank’s thinking and did not openly or covertly try to sway the latter with the RBI Governor quite often forcibly giving a piece of his mind in public forum on several issues that impinge on the health of the country’s financial system in general and banks in particular.

The Financial Stability Report (FSR) of the RBI released towards the end of 2014 did not twist words or put out any sycophantic synoptic picture when it noted pointblank that though the liquidity position in the banking system improved, “concerns remain on account of deterioration in asset quality along with weakened soundness”. It noted that the consolidated balance sheet of scheduled commercial banks (SCBs) registered a decline in growth in total assets and credit for the fourth successive year. This decline is ascribable to a host of factors ranging from weaker economic growth, de-leveraging, persistent pressure on asset quality leading to augmented risk aversion among banks and also to increasing recourse by companies to non-bank financing including commercial papers and external commercial borrowings.

What is worrisome is that credit growth on a year-on-year basis continues to decline and logged low growth at 10 per cent as of end-September 2014, with public sector banks (PSBs) underperforming the rest with a growth of 7.9 per cent. Growth of deposits too plummeted to 12.9 per cent as of September, 2014 from 13.7 per cent as of March 2014. The fall in credit growth is understandable as the SCBs are too risk-averse and being smug with parking in safe haven government securities, particularly when their gross non-performing assets (GNPAs) as a percentage of the total gross advances increased to 4.5 per cent in September 2014 from 4.1 per cent in March 2014.

A particularly dismal trend is that PSBs keep on recording the highest level of stressed advances at 12.9 per cent of their total advances in September 2014, followed by private sector banks at 4.4 per cent. The disconcerting development is that there are 20 banks which have higher share in the total stressed advances of all SCBs than their share in the total advances of SCBs! These 20 banks together have 43 per cent of the total SCB loans and contribute around 60 per cent of the total stressed advances of the banking system. Five sub-sectors viz., infrastructure, iron and steel, textiles, mining (including coal) and aviation, had “significantly higher levels of stressed assets. These five sub-sectors had 52 per cent of total stressed advances of all SCBs as of June 2014, whereas in the case of PSBs it was 54 per cent.

It is startling to note that the spurt in NPAs which now towers over two trillion rupees, thanks to a slew of questionable initiatives ranging from loan melas in the 1970s, farm loan waivers in the early years of the last decade to a perpetual disbursal of taxpayers’ money to a motley crowd of companies and individual industry that only fuelled crony capitalism of the worst sort. Now that the Modi Government has told them to stand on their own feet and take a call without fear or favour to rev up their business, better days might still be possible to the beleaguered PSBs, if only they gather their scattered commonsense and wits to seize the opportunity for impartial decision-making. But the government’s overzealousness in promoting its pet projects such as Jan Dhan Yojana and Swachh Bharat Abhyan might turn out to be a draft on PSBs in the absence of private sector banks not even taking up a small part of the gargantuan burden that is unduly cast on the PSBs!

With the NDA government being determined to dilute the government’s stake in banks in order to provide cushion not only for balancing its budget numbers but also to ensure that they fulfill the enhanced capital adequacy norms as per Basle-III commitments, it is not in the wholesome interest of the banks to have so many bad apples in their brittle bags when they are going to be put up for a beauty contest to be picked up by prospective suitors. It is a salutary sign that both the authorities in the government and the banking regulator recognized the operational roadblocks confronting the domestic banking industry, particularly the PSBs and they are serious to clear the pathway for progressive development of the PSBs.

As a regulatory of the banking industry as a whole, Dr. Rajan has his tasks cut out till each one of the PSB where the hard-earned money of many small depositors as also salaried classes and middle-income categories are lodged do not lose sleep over them. The moot point is whether Dr. Rajan would be able to succeed in this Sisyphean task of cleaning up the banking mess or quietly get kicked up to a sinecure position in the imminent BRICS Bank as is bruited?. (IPA Service)