Banking Crisis in India – Failure of Governance and Regulation

Now Banking Crisis in India is a hot topic as you know many business men looted bank and escaped to foreign countries. In the 2008 , crisis loomed world over , all major economics effected and growth rated declined , inflation doubled, unemployment increased. However it’s impact was minuscule in India due to strong banking sector in India. In the past also Asian economic crisis happened due to failure of banking sector in Asean countries .

At that time also India immune from crisis due to fortified banking sector. Such a great role banking sector played in India, however recent incidents like vijay malya evasion of bank loans, nirav modi scam, icici loan to Videocon shaken the credentials of banking sector . Is it because of failure of governance or failure of Regulation, to know that issue need detailed analysis.

Banks contributions in Economy

Banking is lifeline of any economy. It looks like simple thing like collecting money from people and giving credit to people , and retuning the money with interest when depositors wanted it. But banking does many more functions, like financial inclusion, through priority sector lending loans to agriculture, msmes , renewable energy, issuing bonds, facilitator in foreign exchange, and many more . That is why it’s cascading impact is huge on many other sectors, after all everything needs money.

In the history also banking sector role is crucial in industrialization of western counties . Bankers acted like king makers in the past , jagat Seth role in battle of plassey was well studied. Bank of France played phenomenal role in Napoleon campaigns. Great depression was caused when banking sector failed and people queued at banks to withdraw money as they presume bankruptcy of banks. All these examples clearly tell us banks can make economy or break the economy.

India also understood the importance the importance of sector . To make banking more inclusive and secure and safe , nationalization of banking done at early stage. Although some disadvantages are there but helped in making financial inclusion through banks. Later on India implemented narasimhan recommendations and allowed private sector to participate and can hold 74% of stake. These innovative steps increased competition and productivity of banks.

Banking Crisis in India : Challenges and Problems

However at present banking sector in crisis due to many challenges. NPA issue looming , around 8 lakh crore non performing assets, wilfull defaulters like Vijay malya, bank employees collusion with corporates to loot bank, capital to risk adequate ratio dwindling, conflict of interest while sanctioning loans, and many more. But the bigger question is what is the root cause of these problems or symptoms?

1. Banking sector has many social obligations but any govt must handle with professionalism. However banking sector does many non banking functions as they are controlled by govt. Demonetization caused great burden on banking sector. Financial inclusion under Jan Dhan yojana, distribution of scholarships, pensions, selling electrical bonds, some institutions applications also available at banks. These extra banking functions increase burden and focus of employees also shifting , not giving full time to banking functions.
2. Banks recruitment system also not so effective, except SBI other recruitment tests are not so standard and need to be updated to meet the latest standards and requirement. Training to selected candidates also need to updated with latest frauds.
3. To get deposits banks need to offer compatible interest rates, however rates offered by kisan.vikas pages, and other small savings scheme are better banks, so banks are not attracting deposits in large scale, govt keep on recapitalizing banks to meet Basel norms. This is not a good trend. Banks can’t offer market interest rate but it should not be less than postel scheme interest rates.
4. Customers face many problems like waiting in queues, cheque bounces, forgetting passwords, failure of netbanking and so on. If banks respond quickly customers show interest to banking, otherwise they simply move to chitti business, or invest in relation estate or gold.
5. Lack of accountability, here employees believe it is not their money and collude with corporates, corporates believe they are not looting people as govt recapitalize banks, ultimately tax payers money is using to compensate the scams. If taxpayers money is using for filling scams, will they pay taxes , that is why we have low tax to go ratio 11%.
6. At the lower level salaries are good in public banking sector , however to attract professionals at the higher level , salaries must be increased , otherwise public sector employees collude with corporates like pnb scam. Raghuram Rajan said his salary as professor is 10 times more than rbi governor reveal the horrible picture , and SBI chairman salary was hardly below 1 crore, whereas any corporate CEO earns 50 crores minimum.
7. Political interference is another major reason for crisis in banking. Major higher level appointments done by govt, and many former rbi governors talked about finance minister interference in rbi functioning. Recent SBI loan to adani group also exposed the same. Nayak committee also written about it , and banks board bureau was established to appoint high level officials, however it was not functioning effectively.
8. Banks lend for infrastructure projects , this was one of major reason for npas as these projects gestation period is long , so banks must not fund them, and bond market need to take care of it. And other international mechanisms like world bank, adb, aiib can be given more importance.
9. There are some arguments that public sector banking is a major reason for crisis, however combination of public and private sector worked out well in western counties also, so instead of focussing on privatization of banking , reforming the public sector would help to resolve the crisis.
10. Npa problem can’t handled by banks alone , because many governance problems like environment clearance, delay in project approvals, export import policies, and destructive technologies like jio also cause npas. So here both banks and govt work together to resolve the npa problem. There are many steps like asset reconstruction companies, sdr, ,s4dr, insolvency and bankruptcy code, joint lending forum, 5/20 scheme, are taken but much more need to done.
11. Rbi is the regulatory power and monitor the banks functionality. However there are many functions to rbi and it can’t check each and every transaction so problem raised.
12. There are many statutory audits , multiple checks and balances before do any transaction, however in pnb scam , many audits are bypassed.

In the core banking solutions, bank must align with swift , but synchronization not happened, why regulatory failed to check it?

After the scam RBI simply banned the letter of undertakings, is it a viable step ???

As per bank rules employee need to transfers at regular periods so they can’t abuse the position, however in pnb same employee handled the issue for 5 years, failure of rbi in ensuring complinace.

Recently CBI questioned the former deputy governor over bypassing statutory audits, this also reveal some laxity from rbi.

Internal risk management is crucial while sanctioning loans, here this system failed, but regulatory could not find it, till the scam exposed.

However it is not to blame regulatory because public sector banks have more powers when compared with private sector, and rbi is asking for same powers in public sector also.

Banking Crisis in India :Solutions

So from the above discussion , failure of governance and regulation both are reasons for crisis in banking sector. There are some good steps like amendment in banking Regulation act to give more power to rbi to take decisions to reduce npa, and above 50 crore bad loans are monitored by enforcement agencies, and steps like big private audit firms must audit which public sector banks would not allow now, and independence and autonomy to banks while ensuing compliance, market based salaries to higher professionals, clearing the balance sheets would ensure sustainability of banking sector. Laws like confiscation of property of fugitives , and extradition treaty with nations like UK and western nations help to repatriate those absconders like Malya,Modi.

To.conclude, in India banking is not simply an institution to save money, but a way of life, part of life. Any major activity like marriage, seeding, education, would not start with out withdrawing money from bank. Although banks don’t offer big interest rates , people deposit money out of Nostalgia, safe venture or out of habit. But now this great sector now facing many scandals . Some people are using banks to become richer, willfully not paying bank loans. In that case how banks give loans to start ups? Although rbi reduced repo rate ,banks are not willing to reduce credit rate due to fear of npas, thus credit growth declined. Many bank officials are fear of CBI, Ed and not taking risks to avoid torture. This scenario should be altered. Future belongs to credit availability. Agriculture sector alone need 11 lakh crore loans, how we meet huge demand if banking sector in crisis. So both govt and rbi must implement all steps to regain credibility of banking, and people also should.not lose faith due to one or two scams , and support the sector by reposing unflinching faith, in that case banking sector would easily overcome this crisis, like it did in the past.