Updated: May 5, 2017 12:05:46 am
Karl Marx could have been writing about the bad loan problem in India when he said “Men make their own history, but they do not make it as they please… but under circumstances existing already, given and transmitted from the past. The tradition of all dead generations weighs like a nightmare on the brains of the living.” Today, every Indian banker recognises that the bad loans (NPAs) created by previous generations weigh like a nightmare on the brains of the living!
The NPA problem is urgent and grows every day. The conflict between the political narrative (the government cannot bail out the rich industrialists) and economic necessity (the need for a haircut by banks and the fact that interest compounding itself would have added 80 per cent to the corpus of bad loans in the last four years) makes choices hard and the way forward complicated. A lack of resolution continues to slow the GDP growth rate and is reflected in the insipid IIP numbers. It needs courageous attention.
But there are six other substantive areas that need attention and which may be easier to move on.
One, financing micro enterprises. There are about 50 million MSMEs contributing to about 38 per cent of India’s GDP, 40 per cent of national exports, 45 per cent of manufacturing output and 20 per cent of employment. Of these, 45 million are unregistered micro enterprises that have almost no access to formal credit. Digitisation (ubiquitous connectivity, unlimited data storage, advanced analytics, savage computing power, artificial intelligence, robotics and smart handheld devices) can change the paradigm here. For example, with Aadhaar, a purposeful push in CIBIL, data availability post-GST and advanced analytics, this space is ripe for massive innovation.
The new paradigm can fundamentally change the attractiveness of making low ticket-size loans profitable and challenge the hegemony of money lenders in this segment. Micro enterprises need to be pushed to register and become a part of the credit bureau to facilitate this change. Formal credit will make their businesses more stable.
Two, old private sector banks (OPSB). We have 13 OPSBs with 4 per cent share of banking assets. Compare this with the 14 new private sector banks, none older than 22 years, with 21 per cent share of assets. Federal bank, the biggest OPSB, has half the asset size of Kotak Mahindra Bank and only 15 per cent of HDFC Bank. KMB started 15 years ago while Federal Bank has an 85 year-old history. Imagine the positive impact on the sector if these 13 OPSBs operated at the same level of efficiency as the new private sector banks. To be fair to the RBI, the first steps of change are evident in the recent sale of the Catholic Syrian bank to Fairfax or in the transformation underway in RBL with a new management. Instead of daily media speculation about mergers amongst new private sector banks, there should be a plan to facilitate the takeover of OPSBs by new private sector banks, or to encourage private equity firms to take majority ownership to change the ambition and management of these banks. Their transformation will greatly aid the modernisation of Indian banking.
Three, non-bank finance companies (NBFC). The sluggishness and constraints of public sector banks provide a space for the NBFCs to operate in India. Due to the modest capital requirements of just Rs 2 crore to start an NBFC, there are 12,000 registered NBFCs in India. Yet, the top 25 account for about 80 per cent of total NBFC assets. While getting bank licences in India is very difficult, starting an NBFC is very easy. Yet such proliferation is risky. I would urge the RBI to offer more bank licences and tighten the NBFC regime. The RBI should raise minimum capital requirements of the NBFCs to, say, Rs 100 crore and impose some listing requirement for the NBFC or its holding company within three to five years. Bigger NBFCs will be able to reach unserved segments better and will also be more robust.
Four, public sector banks. Over the past 10 years, I have commented on public sector bank reform. We all know the problems and the potential solutions. There is a need to change the concept of government ownership away from 51 per cent to becoming the single largest owner, as was even recommended in the Narasimham Committee report. This will address the triple issues of governance reform, HR reform and capital constraints. We could debate the method by which we achieve this goal but it is necessary. However, to start with, we could take the modest step of corporatising these banks and bringing them under the Companies Act.
Five, cooperative banks. The entire cooperative bank experiment needs a relook. So far, they have not made a meaningful dent on financial exclusion. In fact, the JAM (Jan Dhan accounts, Aadhaar, mobile phones) push by the current government has done more for financial inclusion than 70 years of cooperative banking. The problems of cooperative banks are well understood but reform is hampered by politics and the consequent dual regulation. They lag in technology, skills and have a tough time raising capital from members. We need to push the JAM trinity and relook at the need for the cooperative bank sector.
Six, payments banks. The RBI created two new bank categories — small banks and payments bank. In my view, the history of small banks in India is a history of failure. Payments banks, however, are an interesting innovation but, in their current form, they are an unviable business proposition. They are allowed to only accept deposits of
Rs 1 lakh or less and invest these in government securities and make money by participating in the payments business. To make them viable, the RBI should consider allowing them to make loans of up to Rs 1 lakh. They can then also address the gap in funding to micro enterprises, currently dependent on the traditional money lenders.
A final pet peeve of mine is the National Housing Bank (NHB). It serves no clear purpose. The NHB should be merged with the RBI, like the FMC was merged with SEBI. If we can move on the areas of reform highlighted in this piece, our banking sector will become more modern, competitive, inclusive, digital and robust. It could enable the Prime Minister’s slogan of “sabka saath, sabka vikas” by making the provision of finance easier for all Indians.
The writer is Chairman, Asia Pacific, Boston Consulting Group. Views are personal
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