The Great Indian Banking Crisis.

For a few years now we have witness number of banks and other financial institution crumbled to dust. Apart from PMC (Punjab and Maharashtra Co-Operative) Bank and Yes Bank crisis there are several small banks crisis that have barely been reported and recently RBI have red flagged as many as 11 bank. So how come most important financial institution of our country are falling apart one by one?

Well the failure of several financial institutions and more importantly banking are mainly due to these reasons. Firstly, Indian banks mainly public sector banks(PSB) are loaded with non performing assets (NPA). This implies that they find it difficult to lend more money to industries and other business out of fear which leads to fall in capital formation which in turn leads to reduction in growth of an economy. Secondly, Public Sector Banks are not professional enough that is government still controls the appointment to their boards and their management are short of talents. Thirdly, Banks are made to do too much and take too much risk. They are made to bear the burden of loan waiver and direct lending. All banks suffer miserably due to lack of well develop financial system that could take some risk.

The banking system in India is overwhelmed by bad loans ( loans which bank fails to recover along with interest). Much of the blame is put on the poor performance of public sector bank but recent crisis in YES BANK shows that problem of poor governance, lack of transparency, government interference is same across all banks in both public and private through direct or indirect channel. And how small solution like privatisation is not a solution to any problems.

Any banking reform should address 2 important areas:

  1. Cleaning up banks
  2. Improve governance and management in Public sector banks

Cleaning up Banks

Under IBFC law, National Company Law Tribunal (NCLT) helps to restructure the loans for the largest firms but it’ll be overwhelmed if every stressed firms files before it. So, we need to find a way for out of court restructuring process so the many cases are restructure out of bankruptcy and NCLT acting as a last resort. Out of case settlement process should be transparent, speedy and it should protect the interest of bankers and harass them using central agency of CBI, CVC, ED on the other hand NCLT should be more transparent and speedy.

Improving Governance

Public sector has still not adequately professionalized since government rather than a independent body appoint boards member which inevitably leads to government interference. Every public sectors bank should independent body which have a power and authority to appoint CEO and hold him responsible for performance. Productivity of employees should also increased through imparting new skills and knowledge as PSBs has a huge talent deficit. Lateral entry should also be promoted at the top most. Banking system should not made to bear risk of the government electoral promises of loan waiver and direct benefit transfer targets because these are often achieved by abandoning appropriate procedure and create environment for future NPA and these measure constraint state and central government budget spending.

Over the there have been many debate and discussion over solution to fix the flaws of about the great Indian Banking crisis. All these debate and discussion often leads two common answers: Privatization of PSBs and Merger of Small and non performing PSBs to good performing and well managed PSBs.

Privatization of Banks

Privatization of Public Sector Banks (PSB) means to process in which government transfer the ownership and control to private entity by selling of its shares. Much of the discussion and debate over privatization are based on the ideology one believes in. Definitely, if the PSBs are given more independence in decision making, policy making and especially in recruitment of high skilled workers it’ll lead to some better result. However believing privatization is the solution to all the problems are short sightedness and foolish. The crisis of YES BANK only brought the biggest vulnerability in Indian banking system, the interference of government across all the bank both private and public is a big reality and lack of proper management and governance across all sector is also a reality which cannot be ignored.

Merger of Banks

Merger of banks often prescribed as solution to address the problem of poor goverance. In this process the poor manage banks are merged with good managed and governed banks. It is uncertain whether this process will result in a good result for collective performance of both banks but it’ll depends on ability of good bank management to impose its policy and will without alienating the employees of poor managed banks. Recently India government merge 10 PSBs and India is left with 12 Public sector banks. Whether this move is a success or not only time will tell.

Bank and other financial institution plays an important role in growth of any economy. It accepts deposit from an individual and lends that any people or business. It gives interest to people who deposit their savings and charges interest on loans, the difference between the two is its profit. Through process of accepting deposit and lending money (loans) leads to capital formation which is very important component of growth of an economy. So the government and all the stakeholder should pay a serious attention on the fragility of Indian banking system.