Hyderabad: India has seen a surge in bad loans (non-performing assets) over the years. The country had more bad loans in 2002 which has declined by 2014. Public sector banks are now more impacted than the private sector banks. The rational solution is that there should be adequate capital and the way the banks are run need to be managed better, points out the former central bank chief.
Government should look at providing capital to banks provided the banks change their management or the way they run them and squeeze credit in the banking sector to address the increase in bad loans.
Former RBI Governor Y V Reddy told Telangana Today, “One of the important measures taken by the government and the RBI has been the introduction of Insolvency and Bankruptcy Code (IBC) to address the bad loans.
This is an important structural initiative that should help in the medium to long-term though bankruptcy alone is not the only reason for bad loans.”
“The IBC is a landmark legislation which addresses one of the fundamental problems relating to bad loans,” he added.
Among the other challenges the banking sector is facing, Reddy said, there is a problem with the dual control over the banking sector where the RBI feels it lacks power to regulate while the government believes RBI is given all the power it needs.
Banking has been the sector that has given the Centre the jurisdiction over development projects that are carried out in the States though the Central government has no developmental staff operating at the State-level.
The banking system has given the access to the Central government to extra-budgeted and unaccounted resources to penetrate into the policies that it could not otherwise do it in terms of its relation with the private sector.
“That’s why many members of the parliament today are business men and many business men are members of the parliament. And this link has been provided by the public sector banks,” he added.
On the ICICI Bank crisis, he said, the regulator has to find out if the bank had adequate capital, if there was mis-governance or there was crime. The matter is between the regulator and the institution and there is nothing with the government in this.
Technology has expanded the horizons of financial inclusion which a decade ago was carried out through traditional banking channels. And 10 years from now, the dynamics of financial inclusion could also rapidly change.
It is a myth that financial inclusion is going to abolish poverty in the country. Financial inclusion will ensure inclusion of those who have finance into the system. This is different from economic, social and political inclusion.
Reddy said, “The pathological problem is that our political economy is incapable of achieving fiscal consolidation. Government borrowing programme should be sustainable. Infrastructure development requiring a lot of funding has led to financial repression which has further impacted the banking sector pushing it into stress.”
There should be fiscal transparency in the system. There is also a need to understand the magnitude of the fiscal burden. The extent of financial burden in the sectors such as banking and energy should be rightly ascertained and reflected. Fiscal deficit should not be under reported.
“We need to look at ways to better understand the lending needs and approach of farmers. While we are naming the industrial loan defaulters as willful defaulters, we are calling farmers as distressed farmers. Farmers across the country cannot be distressed. We need to identify those who are,” he pointed.
Agriculture contributes to about 15 per cent of the GDP and is not expected to significantly increase its contribution in the near future. So India cannot afford to put more money in a contracting sector.
“Solution for agriculture is outside agriculture. Agriculture sector has remained risky and cannot be commercialised unless it is immunised from several risks it suffers from. Policy, power, water & irrigation, quality of seed, supply, minimum support price (MSP) and export policy have become uncertain for farmers. Unless policy mitigation is done, the situation in agriculture will not improve,” he added.
The problem of agriculture is micro-level rather than macro. Political economy is required to keep the farmers satisfied as it’s a matter of ‘bleeding heart’.
Reddy said India still sees a skill gap to increase its manufacturing productivity to look at export growth. The country should not compete with China which has made progress on the exports front. India should manage its external trade balance.
India has an advantage in terms of knowledge-based sectors and services. Countries such as China, Japan are getting old. India has a lot of youth and the confidence of youth about their future in the country is higher than the confidence of youth in other nations.