India’s banking sector survives covid scare but needs to address these challenges now

The Indian banking assemblage is resilient, sufficiently capitalized and well-regulated segment.

By Brajesh Kumar Tiwari

In the past parliament session, the Union Cabinet cleared changes (Deposit Insurance & Credit Guarantee Corporation Bill 2021) to the deposit security laws to supply funds up to Rs 5 lakh to an relationship holder wrong 90 days successful the lawsuit of a slope coming nether the moratorium imposed by the RBI. The authorities has besides permitted raising the deposit security premium by 20 per cent immediately, and maximum by 50 per cent. 

The Indian banking assemblage is resilient, sufficiently capitalized and well-regulated segment. Over the past 7 years the NDA authorities has been infusing superior into the nationalist assemblage banks utilizing recapitalization bonds. However, pursuing COVID and the expectations from the Union Budget 2021-22, liquidity has go a immense issue. Since the past fewer years, respective European banks person confirmed definite disposal operations of impaired loans. This has mostly contributed to a important simplification of the NPL ratio. However, the commencement of a immense secondary marketplace for atrocious debts and the unification of standardized large-ticket assets successful bid to conception a ‘single-name’ portfolio has fixed mode to newer problems. In fact, the banking assemblage is silently reeling nether the challenges thrown towards it, which are:

Maintaining Capital Adequacy:  The superior a slope sets speech for its rainy time oregon to undertake lending activities acts much similar the bank’s hazard threshold.  However, successful the post-COVID satellite banks are facing caller ambush of NPAs connected unsecured loans. Earlier RBI has offered moratorium connected loans and has besides announced the two-year restructuring connected loans to safeguard anemic borrowers, but this concern hints astatine the NPAs expanding from 7.5 per cent successful September past twelvemonth to 13.5 per cent by September this year, putting a batch of accent connected banks. Unless the authorities pumps successful wealth externally, banks volition beryllium successful terrible nonaccomplishment creating monolithic superior adequacy problems. Bad loans and successful failing with maintaining the minimum RBI prescribed Capital Adequacy Ratio, banks volition person to look terrible challenges successful owed course. Moreover, the Basel IV standards that bounds the simplification successful superior is owed to beryllium formalized successful January 2023. Earlier, pursuing the planetary fiscal situation of 2007-08 the planetary implementation of Basel III was formalized and that has already raised the superior adequacy quotient for banks successful bid to mitigate risks. Now, Basel IV, according to planetary banks volition rise the barroom of superior further, which is decidedly a motion of interest for India, fixed its contiguous state. 

Maintaining Asset Quality: Bad loans are a large occupation for the Indian banking sector, particularly the PSBs. As per an IMF study 36.9% of the full indebtedness successful India is astatine hazard and banks person capableness to sorb lone 7.9% loss. Add the COVID situation to this and the banks are struggling to retrieve loans from tiny businesses, which person been severely affected by COVID. The pandemic has enactment a halt successful concern each across, truthful indebtedness betterment is simply a large question mark, which decidedly hurts the banking assemblage arsenic they conflict to support the prime of their assets.   

Maintaining Growth: The wide economical maturation of the state is shunted astatine the infinitesimal and an outward propulsion tin lone assistance each contributing assemblage of the system –corporates, retail, and agrarian prominently. The maturation impetus is fiscal astatine the infinitesimal and the sooner the sectors recover, the healthier it volition beryllium for the banking sector. As of now, the banking assemblage has nary mode of fulfilling its maturation aspirations and is hardly struggling to enactment connected ground. 

Keeping these apical 3 challenges successful mind, present are a fewer suggestions for the banking assemblage successful India, which volition assistance them revive their status.

Things to enactment retired successful abbreviated term

• Restructuring: RBI’s restructuring guidelines connected loans for individuals and businesses not lone enactment arsenic a alleviation for the borrowers, but it besides gives a scope to banks to support their presumption quo. Banks should usage this alleviation play to amended their plus prime portion continuing being a pillar of enactment to the MSMEs. This restructuring is RBI advised and the model keeping successful caput the payment of the banks and customers person been specially devised and has travel successful to effect since April 1, 2021. Since the regulatory guidelines for the indebtedness restructuring are RBI directed truthful the implications of customers delaying payments volition not travel harshly connected the banks. This gives the fiscal institutions a accidental to reorient themselves. 
• Lower involvement rates connected loans: The COVID situation has pushed the system to spell disconnected way and fiscal shortages is an evident occupation each across. Constant currency travel is simply a occupation with some the work assemblage and arsenic good arsenic individuals. Indian banking assemblage should usage this premise to their recognition and statesman offering little involvement complaint loans to individuals and MSMEs. This volition promote lending, which volition stimulate wide economical maturation and springiness banks a accidental to amended connected their CAR. Reform has already started successful the location indebtedness concern space, involvement rates for location loans successful India astatine contiguous person fallen to historical lows. What was astir 8.40% during September 2019 is present astatine 6.49-6.95% range.
• Improved diligence: While it is indispensable to pump successful much wealth successful to the strategy to assistance prolong businesses and to boost the economy, it is besides arsenic a necessity to support atrocious loans astatine bay. Bad loans pb to higher NPAs implicit time, truthful owed diligence has to beryllium observed erstwhile offering funds. This volition assistance support frauds and unscrupulous radical astatine region and the banks volition past beryllium capable to widen wealth to rightful and needy businesses oregon individuals. Proper scrutiny and stringent exertion measures volition assistance debar wrongdoings. Moreover, banks should beryllium cautious erstwhile giving loans to Indian companies who person heavy borrowed abroad. This is due to the fact that according to RBI, this volition enactment banks nether unnecessary vulnerability to dollar and volition further adhd to their existing excavation of problems. 

Things to enactment retired successful agelong term

• • Technology upgradation: Digitalization is the buzz connection for businesses and banking, particularly PSBs should accommodate to the conception of integer to marque banking operating seamless. Technology volition marque oregon interruption the mode radical look astatine services successful the coming time, truthful banks should thrust the autobus earlier it leaves the stop. From adding top-notch exertion to upgrade services to upgrading existing set-up, a batch of opportunities lies successful exertion and harnessing the aforesaid volition assistance bringing successful a large alteration successful approaches. 
  • Technology reach: Tech inclusion and tech literacy campaigns should beryllium undertaken to guarantee that paperless banking oregon basal tech services are truthful casual to usage that it is available/accessible and usable to all. This is not undoable. If radical tin bid products connected Amazon, usage Facebook, wherefore not banking services. Of course, with due information measures successful place. 

• Focus connected MSMEs: Banks, including PSUs are chiefly keeping their attraction connected retail advances oregon corporates today. The banking assemblage mostly chooses to disregard the MSME advances. This inclination is not steadfast for the system and volition not assistance banks turn successful the days to follow. MSMEs are the backbone of Indian system and creates employment for 70 cardinal people. This assemblage has a 16% publication to the Indian GDP, which arsenic per reports is to go 25% by 2022. Certainly, the prosperity and maturation of this assemblage volition assistance leverage the system and springiness it a prosperous enrichment. 

• Customer-centric Innovation: Innovation is cardinal to lawsuit loyalty successful today’s time and property and successful bid to triumph lawsuit loyalty successful agelong term, banks should absorption much connected innovation. Keeping gait with the changing situation and different manufacture practices the banking assemblage should put successful innovation that volition assistance them service their customers with ease. The much agile the services and banking practices, the easier it volition beryllium for the lawsuit to slope with the partner. 

The pandemic has been an oculus opener for everyone successful immoderate mode oregon other. However, counting successful the positives of the pandemic determination is simply a accidental to relook astatine the economy. This is the close clip to repair and reorient arsenic we hole for a amended tomorrow. 

(Brajesh Kumar Tiwari is the Author of “Changing Scenario of Indian Banking Industry” Book; Associate Professor Atal Bihari Vajpayee School of Management & Entrepreneurship (ABV-SME); Member (Innovation Council, JNU); Jawaharlal Nehru University (JNU). Views expressed are the author’s own.)