The banking sector is the section of the economy devoted to the holding of financial assets for others, investing those financial assets as leverage to create more wealth and the regulation of those activities by government agencies. It is one of the most vibrant sectors of the Indian Economy and requires timely reforms.
Banking Reforms are the reforms of the Indian banking sector under the objectives of solving the chronic nonprofit earning problems and strengthening of the overall health of the public sector banks to face international competitions. The reforms include legislative regulations that are necessary for the optimal banking sector.
Under the ‘Research Festival’ organised by The Economics Society, SRCC on 9th November, Mr. Ashok Lahiri, ex-Chief Economic Adviser to the Government of India, addressed the significance of Banking Reforms and the challenges the sector faces from time to time. He was glad to be back to the college from where his career had begun. He reminisced teaching in the halls of SRCC and getting his first-ever paycheck here. He then introduced the topic for his speech which was Banking System in India and the need for reforms. Looking at the current condition of the Banking Sector in India, the topic was extremely relevant.
He began his talk by first addressing the problems in the Indian Banking Sector. The first and most prominent issue was that of failing banks. The problem of failing banks is not new. Between 1947 and 1969, 559 banks in India failed, with numerous people losing their life’s savings. He then went on to talk about a rupees 10.3 lakh crore problem faced by the Banking Sector caused due to NonPerforming Assets.
A non-performing asset is a loan for which the principal or interest payment has remained overdue for a period of 90 days. These NPA’s can be classified into three categories- substandard, doubtful and lost assets. When an asset has remained NPA for a period less than or equal to 12 months it is said to be substandard. The asset will be called Doubtful if it has remained substandard for 12 months or more. When the asset becomes uncollectible and all hopes of its recovery are lost, it is said to be a lost asset. He also explained why the issue of NPA’s arises in the first place. NPA’s may be formed due to banking frauds such as the infamous cases of Vijay Mallya or Nirav Modi.
Another reason for loans to become bad may be diversification of funds away from the purpose for which they were borrowed. Poor judgement on the part of the borrower may lead to his losing the funds allocated to him which in turn leads to NPA’s. It is not always necessary that a business may have committed fraud due to which it is unable to repay its loan. It may also be due to business failure. The business may become unsuccessful due to global market conditions, the competition in the market or due to maladministration in the corporation. Loans may be defaulted even due to natural reasons such as floods, droughts, earthquakes, tsunamis etc. All this being said, why is the problem of NPA’s such a big issue that all the newspapers seem to talk about it? India has more than rupees 10.3 lakh crores classified as Non Performing Assets. The ratio of gross NPA to advances was 11.2% while the net NPA ratio was 5.3%. Non-recovery of loans along with interest forms a major hurdle in the process of the credit cycle. These loans affect the bank’s profitability on a large scale. The rising NPA has had posed a great challenge on the survival of Banking Industry in India. Mr Lahiri then described another hurdle faced by the Indian Banks which was Inadequate or Expensive credit. India’s credit to GDP ratio is approximately 49.9% while that of the USA is 186% and China’s is 161.1%. Greater the percentage of Credit to GDP more the contribution of the financial sector to the economic activity of a country.
After having given various sights into the problem of NPAs, Mr. Lahiri talked about the various past reforms introduced in the Indian Economy and the related committees. H talked about how two such expert Committees were set up under the chairmanship of M. Narasimham. They submitted their recommendations in the 1990s in reports widely known as the Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998) Report, which were set up in order to study the problems of the Indian financial system and to suggest some recommendations for improvement in the efficiency and productivity of the financial institution. These recommendations not only helped unleash the potential of banking in India, they are also recognised as a factor towards minimising the impact of the global financial crisis starting in 2007. Unlike the socialist-democratic era of the 1960s to 1980s, India is no longer insulated from the global economy and yet its banks survived the 2008 financial crisis relatively unscathed, a feat due in part to these Narasimham Committees. Various other subsequent reports such as Raguham Rajan 2008 report on financial crisis and Government of India’s report regarding capital accountability were cited as examples.
Finally, Mr. Ashok Lahiri talked about the dynamics of the several banking sector reforms such as Asset Quality Reforms, which included reform of the regulatory architecture i.e. Reserve of Bank India, which finally commenced its operations in 1935. Dr. Lahiri described it as the “imperial bank of India”, and also called banks a “peculiar animal.” He further talked about how both regulation and deregulation are important, and how an exchange risk is always impending. Moreover, talking about financial inclusion, Dr. Lahiri expressed his disapproval of Loan Waivers. He said, either there isn’t enough credit, or if there is enough credit, it isn’t available at a cheap price. Many more reforms such as setting up credit rating agencies and restructuring the public sector banks through legitimate legislations were cited by him.
By Anirudh Kaushik
1st year Undergraduate Student