In his opinion piece, Manish Sabharwal, the Co-founder of Teamlease Services, explains why merely providing more credit (or loans) to people or declaring moratoriums is not enough for the economy to recover.
“A modern economy grows by lending and a modern state is a welfare state. But fiscal constraints or natural disasters often create temptations to disguise spending as lending. COVID’s pain is breeding unreasonable requests like interest waivers, endless moratorium extensions, blanket one-time restructurings, fudging accounting, reducing capital adequacy, 24-month IBC suspension, etc,” he writes.
The last 50 years suggest that the “Diet Coke approach to banking” — taste without the calories — doesn’t work in raising the financial inclusion of migrants, self-employed, and MSMEs.
According to Sabharwal, the last 20 years have given three lessons:
1. Giving loans is easier than getting them back (corporate credit growing from Rs 18 lakh crore in 2008 to Rs 54 lakh crore in 2014 created a Rs 12 lakh crore bad loan problem);
2. Breaking the thermometer doesn’t help the fever (disallowing accounting fudging and restructuring would have saved Rs 7 lakh crore because banks would have run out of capital) and
3. Government banks need more than capital (their risk-weighted assets are lower than two years ago despite a Rs 2 lakh crore capital infusion).
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He writes that “history recommends patiently balancing financial inclusion and stability by persisting with our five-pillar strategy”.
These five pillars are:
1. Greater competition in banking: “Raising credit availability and lowering its price needs competition-driven innovation…We need many more banks,” he writes.
2. Better governance in private banks: Governance “must move from a jaagir (perpetual private fiefdom) to amaanat (trustees that hand over in better condition to the next generation)”.
3. Better governance in public sector banks: “Government banks and companies sometimes have the wrong “tone from the top” that says the return on equity and market capitalisation doesn’t matter”.
4. Better supervision by the RBI: “Recent accidents in financial institutions reinforce the importance of statutory auditors, ethical conduct, shareholder self-interest, and risk management”.
5. Better regulation of NBFCs: The regulatory apartheid between banks and non-banks that has existed in the past must be ended.
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