Sufficient flow of bank credit is sine quo non for the revival of the economy that is passing through a phase of deeper slowdown. At a time when the acceleration of bank credit is needed, the banking system saw a historic low. But banks are now settling fast and emerging out of the collateral damage caused by the failure of some of the mighty non-banks. Debt delinquencies, impediments to the roll-out of debt instruments and successive downgrades by rating agencies are adding to the woes.
The renewed buoyancy of the New Year resolutions should be able to accelerate the flow of bank credit in a sustained mode, more importantly by public sector banks that have suffered a major setback in dispensing credit. Banks, regulators and the government have been working together in cohesion to revamp internal capabilities of PSU banks to create a strong ecosystem to help increase the flow of bank credit.
Marginalised Role of Banks
It will be pertinent to mention the ‘Report on Trend and Progress of Banking in India – 2018-19’ released by the RBI recently. It affirms the increasingly marginalised role of banks in providing finance to trade and industry in the last few years, fast losing its grip on the market share.
Compared with the domestic financial sector, funds from overseas could step in, more from external commercial borrowings (ECBs) that were liberalised by the RBI. Adding to the diminishing appetite of banks to lend, the general slowdown in business sentiments also reduced the demand for bank credit. The combined circumstantial impact dried up bank credit during the last two years much to the detriment of revival of the economy.
The share of bank credit in the total flow of funds to the commercial sector declined from 42.8% in 2017-18 to 36.8% in 2018-19 and went negative during HI (April-September) of 2019-20 to -13.4%, badly hitting the flow of bank credit. The share of flow of funds from non-banks that were grappling with liquidity stress due to failure of infrastructure Leasing and Financial Services (IL & FS) too saw a dip.
In a bank-driven economy, if PSU banks having intense reach in the hinterland are unable to optimise lending operations, its impact could prolong revival of the economy. More so, when the grassroots level economy is still convulsing after demonetisation. Even some of the private banks have been suffering due to instances of poor corporate governance and issues of conflicts of interest that could have retarded business sentiments and performance buoyancy.
Challenges Facing Banks
PSU banks had some unprecedented challenges no doubt. These include (i) successive frauds, lingering impact of PNB mega fraud and its consequential impact on peer banks (ii) failure of some of the large non-bank financial companies (NBFCs) with its collateral impact on the liquidity and asset quality (iii) failure of Punjab and Maharashtra Cooperative Bank (iv) operational restrictions under prompt corrective action (PCA) continuing in some PSU banks; (v) continuing slippage in asset quality with new loans turning substandard despite rigour in monitoring under early system — special mention accounts framework (vi) prolonged loan recovery process even after invoking the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (Sarfaesi Act) wherever collaterals were available (vii) continuing divergence in the asset quality data between banks and regulator having its impact on the incremental credit growth (viii) fear of staff accountability and looming threat of vigilance that slows credit decisions.
Though the Insolvency and Bankruptcy Code (IBC), 2016, has begun to make a positive impact on the attitude of bank borrowers, actual loan recovery and final debt resolution continue to dither. There is also inevitable disruption on account of massive ongoing restructuring and consolidation of PSU banks and uncertainty in the minds of even top management about pursuing a business vision.
Next Level Reforms
In order to infuse better capability, a new version of comprehensive PSU bank reform -– Enhanced Access to Service Excellence (EASE) — was introduced in 2018-19 while deciding to infuse capital in various forms to the tune of Rs 2.1 lakh crore. Based on six themes, the EASE reform agenda was meant to promote a transformative smart and clean banking and to prompt a cultural shift towards qualitative banking. The progress of EASE assessed till Q3 of 2019-20 demonstrated resilience of PSU banks to embrace change.
Taking a cue from the qualitative shift in the working of PSU banks, speedy transmission of policy rates on the anvil and early signs of revival in demand for credit, it is possible to expect better credit flow to trade and industry beginning in 2020. Moreover, the earlier cuts in deposit rates should be able to create more space for banks to cut lending rates.
According to the RBI, as against repo rate cut by 135 basis points, banks have cut lending rates by 49 basis points. Unless PSU banks are able to dispense speedy credit at affordable interest rates, they will fast lose their market space and alternative financial intermediaries will fill the gap.
Activated small finance banks (SFBs), fintech companies, peer-to-peer (P2P) lenders and non-banks with better recovery and loan follow-up systems will soon assume a predominant role. The reforming PSU banks undergoing the phase of massive consolidation now should not allow disruption to overtake their potentiality to grow. PSU banks should work to restore their formidable position by unleashing the synergy of an evolving ecosystem. Going by the trends and renewed capabilities of banks, 2020 should be able to see a credit-centric banking growth that will speed up revival of the economy.
(The author is Adjunct Professor, Institute of Insurance and Risk Management, Hyderabad)