25 Feb 2016 20:35 IST

Can you bank on this year’s Budget?

Banking reforms are the need of the hour

With the recent news of Indian banks posting record losses, it is time for the Finance Ministry to start taking concrete steps in order to mitigate the current situation faced by the Indian banking sector.

The issue of NPAs

In the first half of the decade, Indian banks, both public and private, have accumulated a huge amount of non-performing assets (NPAs). These NPAs had to be written down over the years based on RBI guidelines, in effect impacting the bottom line of all major banks. While the situation in the private banks’ books is not all that bad, their public sector counterparts are bleeding big time. Considering the implementation and compliance with Basel III norms around the corner, the Finance Ministry (in sync with the RBI) needs to take some bold steps in order to control the situation. The Ministry needs to dig deep into the balance sheets of these lenders to understand the gravity of the situation and chalk out possible solutions.

The Budget will be one which is closely watched by Indian banking executives, and the pressure on Jaitley to expedite and deliver in light of this alarming problem is high. The Ministry must come up with a slew of measures in order to get a grip on the situation.

Setting up a ‘bad bank’

A bad bank, as the name suggests, would be one which will take over all the junk, or NPAs, of public sector banks, and work towards revitalising them. This will not only speed up the resolution process in most cases, but will also allow public sector banks to focus on their core competencies and improve profitability. Fast tracking of the legislation of the bankruptcy code is another complementary step which will help overcome the problem of non-performing asset recovery.

Contributing to the start-up ecosystem

With the start-up boom in the country, banking is one sector which has remained aloof and not contributed in any direct manner. It is still not a sizeable stakeholder in this ecosystem. The Finance Ministry must encourage public sector banks and their private counterparts to develop financial products which would enable entrepreneurs to have access to funds without the need for heavy collateral. Although this sounds like an easy measure, it is one which would be need to be taken seriously, given the lack of reliability of cash flows in this domain. The idea is to reduce the heavy reliance on venture capitalists and angel investors for young entrepreneurs with a small but scalable business model.

Recapitalisation

As of July last year, industry experts estimated an amount of ₹2.4 lakh crore as the quantum required to recapitalize public sector banks to meet Basel III norms. The Ministry is expected to submit a proposal on how do they expect to do the same. The funding sources and timelines need to be categorically submitted in order to begin the process of recapitalisation. However, banks need to first work on improving performance in operations and translate that into positive sentiment on Dalal Street.

The banking industry is facing difficult times and reforms in this space are what we expect the Ministry to come up with. However, each measure will come with its pros and cons. We do not want a situation where banks keep getting their coffers filled with tax payers’ money and thereby become complacent in terms of operational efficiency. Banks that do not toe the line need to be taken to task in the future, and the tax payer needs to be given enough assurance of judicious use of funds at the Central level.

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