In a recent event of the Federation of Indian Chambers of Commerce and Industry (FICCI), the country's Chief Economic Advisor (CEA) Krishnamurthy Subrahmanyam said that India's banking sector is holding back the growth of the economy.
The CEA said, "We are caught in a cycle created by the banking sector."
He said that a large part of any economy consists of big banks and in India, the only State Bank of India (SBI) is the only bank that comes in the top 100 banks of the world. There are "scale and quality problems" with Indian banks.
So what makes the Indian banking sector sick?
The answer is not easy. Partially this issue is inherited, it is related to the problems of this entire system and partly behind this, there is no effort of politicians and policymakers to help the borrowers in bad times.
In the present time, banks are withdrawing from giving loans because there is a lot of pressure on them for bad loans. Bad loans are loans that borrowers are unable to repay and thus this money of banks gets stuck.
If banks do not do the work of lending money, then they will not get capital and in this way, the growth of the economy gets pushed.
Due to many reasons, loans become bad loans. These include cases of financial lethargy and sometimes fraud.
The Reserve Bank of India (RBI) has been trying to deal with this situation by creating strict regulations and policies and has also got some success in it, but it is still a long battle.
There was a period of lethargy before the outbreak of the epidemic in the country. The country's gross domestic product i.e. GDP grew at a rate of 8.3% in 2016-17. In 2017-18, the country's growth rate fell to 7%, in 2018-19 it came down to 6.1%, while in 2019-20 it fell to just 4.2%.
The country's growth has been falling for the last three consecutive years. Covid-19 has made this situation worse.
Sanjay Aggarwal, senior director of CARE Ratings, says, "Covid is the biggest challenge and until we get in a position to understand its impact on the economy, all the other factors will remain volatile."
IndusInd Bank, Axis Bank, Indian Bank, Bandhan Bank, RBL Bank and Kotak Mahindra Bank have all incurred losses due to Covid-19. These banks have had to make separate provision of money due to Covid.
Global rating agency Moody's has said that public sector banks will need additional capital of Rs 2.1 lakh crore to overcome this epidemic.
Non Performing Assets (NPA)
Moody's and S&P Global have said that India may face more challenges than other Asian countries due to high NPAs during efforts to revive the economy from the epidemic.
When banks are unable to recover both principal and interest from their given loan, they put such loans in the NPA.
In the Financial Stability Report (FSR) in July, the RBI said that the gross NPA (GNPA) ratio of all banks could increase from 8.5% in March 2020 to 12.5% in March 2021. If this happens, it will be the highest level of GNPA in the last two decades.
The RBI has also warned that in a very serious situation, this ratio can also increase to 14.7 percent. Banks are worried about such a situation and do not want to give loans.
Economist Vivek Kaul explains, "Banks are not getting good borrowers so they are not lending. Most companies have a lot of debt and no good banker would want to lend at such a time."
Are banks over-conscious?
The RBI has cut repo rates so that growth can be increased and lending rates can be reduced. Overall in February and March, RBI has reduced the repo rate by 1.15%. RBI has reduced the repo rate by 2.5% since February 2019.
The reduction in repo rate means that banks can lend money to their customers at a lower rate of interest as they get money at a lower rate than the RBI.
The RBI uses the repo rate to control inflation and to encourage banks to distribute debt.
However, the cut in RBI interest rates has not yielded the expected results as banks are still holding back from disbursing loans.
Credit growth in the country was 6.9 percent in April 2019, which has come down to 1.4 percent in March 2020.
Karthik Srinivasan, group head of Icra's financial sector ratings, says, "The slowdown in credit growth is the reason for the slowdown in economic growth and banks trying to avoid risk."
Experts believe that Indian banks are being more vigilant and prefer to lend only to select sectors. To make loans cheaper for banks, besides this, RBI has also tried to ensure that banks do not earn direct profits by keeping their money with RBI.
The RBI has reduced the reverse repo rate to 3.35%. Since the onset of the epidemic, the RBI has reduced the reverse repo rate by 1.55%. Despite this, banks are depositing their money with the RBI.
The reverse repo rate is the interest rate at which banks deposit their capital with the RBI.
Vinay Noval, who runs a telecom tower company, has been facing lethargy for the last two years and now Covid has added to his woes. Vinay Noval, director of Encorp Powertrans Pvt Ltd, says, "For now the problem is to sustain itself. To stay in business, working capital is required which comes from banks."
He says, "Banks are saying that you do not have good credit and we cannot give you a credit line. I talk to my banker every day, but they are not ready to listen." Online financial services marketplace bank market says that demand for loans such as personal loans, car loans, home loans has come down, but the demand for credit cards has increased.
Bank Market Chief Executive Officer (CEO) Adil Shetty said, "In times of crisis, most banks are taking a hard line to give loans, but the demand for credit cards is increasing as people use them for different expenses. Are. In the future, this demand is going to last. " Economic activities have come to a standstill due to the implementation of lockdown in the entire country. In this case, companies are also more cautious.
The government has tried to help small businesses by announcing an economic package of 20 lakh crore rupees and assured the banks that they can start giving loans. Experts believe that by taking more clarity and accountability on the part of the government, the trust of banks can be returned, but they can continue to prefer to loan only to big and financially sound businesses.
A survey of CARE ratings in June and July covered 345 MSMEs. It was found in this survey that only one-third of the companies involved in the survey could get the benefit of this government scheme. According to Sakat Roy, head of MSME, Care Ratings, "What will companies do with this money? They are not able to operate at the earlier levels of Covid."
A report by the Global Alliance for Mass Entrepreneurship says that 30-40% of companies in India's MSME sector may be shut down during the Covid era.
Moratorium (Exemption from debt)
Retail loans have also been halted during the epidemic. RBI has also given temporary relief from repayment of all types of loans till 31 August so that the borrowers can get relief. This means that from March to August, neither any money will come to the banks nor customers will come to take a loan.
Now the RBI has announced the first type of debt restructuring on personal loans too. With this, the borrowers will get the freedom to repay their money in a phased manner. Banks will have the right to decide whom to offer and to whom. This activity will also take time and if this scheme fails, it will also hurt banks' pockets.
What will happen next?
Experts believe that credit growth is a bigger problem for the Indian banking sector than NPA. Banks have to start lending, which are the main means of their earnings.
Banks have to rely on their decisions. It is not that the banking sector is faltering. Banks are in a good position through the provision of bad loans. Provisioning means that banks already set aside enough money for their bad loans. The RBI is also vigilant and has a strong structure for bad loans and fraud.
According to Sujan Hazra, Chief Economist, Anand Rathi Securities, "The biggest challenge is governance in state-run banks. They are also forced to fulfill social responsibilities."
He says, "I think it may take up to 24 to 36 months for the banks to recover from the present situation."
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