BANKING SECTOR AND BAD LOANS

It is important to note that the banking sector has taken a big beating over the past five years.

• Most of the bad loans turmoil occurred on account of excessive lending between 2009 and 2013.
• However the massive cleanup process of BANKS’ Balance Sheets has cost the sector and economy heavily.
• Risk aversion by bankers, let apart the sharp slowdown in the economy, has impacted lending.
• For listed private sector banks, while loans have grown at 16 per cent CAGR (between FY14 and FY19), profits have shrunk 4 per cent, owing to a 30­40 per cent which in turn has resulted in an annual rise in bad loans.
• For PSU banks (PSBs), the modest growth in loans (6 per cent CAGR) and over 30 per cent rise in delinquencies have been the root cause for a hit in their earnings.
• The performance of banks this fiscal has been equally disappointing.
• The growth in bad loans has fallen considerably in the first half of the fiscal, because of a high base (bad loans had galloped last year).
• Bank credit growth, which had climbed to 12 per cent in March 2019, slipped to about 7 per cent as of December.

Reviving lending Apart from restoring the confidence of depositors:

• Possibly by increasing the deposit insurance cover and addressing specific bank issues the Government has an uphill task in reviving lending activity.
• Structural reforms and big government spending that can kickstart investments will be overbearing.
• Addressing PSBs’ capital and Governance Issues will be critical, if they are are to get ready for the next leg of lending.
• The Centre has pumped close to ₹2.7­lakh crore into PSBs between the FY 18 and FY 20, as much of it has been sucked into bad loan losses.
• The Centre announced the long awaited consolidation move last year, reducing the total number of PSBs to 12 from 18. But the merger of these mammoth banks — importantly, the terribly weak ones — will be no walk in the park.

Governance of PSBs:

• Hence, what runs high on the Budget wish list is a significant overhaul in the Governance structure of PSBs.
• In the year 2015-16 Budget while the Centre had proposed the constitution of the Banks Board Bureau (BBB), an independent selection process for top bank officials, it has proved a damp squib.
• Laying down the roadmap for government stake dilution and granting more autonomy to bank board will hence will be critical in the upcoming Budget.
• A thrust on investments and reforms in key sectors such as infra, power and realty will augur well for banks such as SBI, HDFC Bank, ICICI Bank and Axis Bank,  which have strong capital bases.
• For PSBs, governance reforms will benefit in the long run, but near term capital challenges will persist.