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The Banking Sector was already in crisis. Crisis was created through the policies.  Large credit was encouraged leading to the NPA Crisis. Development institutions like IDBI, ICICI and even UTI were converted into banks. HDFC was again converted into a universal bank and focus on housing was gone.

There is no real attempt to recover NPA. Rather write off in the name of haircut is going on.

As per an assessment of an analyst, SBI will be showing a loss of Rs.15000 Cr (last year it declared profit but RBI says the NPA provision was not done proper and actually the bank made loss). Most of the banks will show loss as credit off take has been down due to weakening of economy and general scare to lend because of which banks are depositing their funds in reverse repo, bonds and securities with low return. Whatever increase in lending figures is due to additional interest and adhoc credit limits to existing accounts.

If the Financial Risk Management criteria are changed states will borrow more for development activities. The demand of the Kerala FM to lend to states at reverse repo rate or repo rate is just. It will make a lot of difference but not done because FIIs don’t like it. When the whole world has given up fiscal deficit target of 3.5% including India the states should be given freedom to borrow and cheaper credit should be made available.

Over a period, the banking crisis has increased due to the following factors.

  • Banks were forced the move towards digital banking and the recruitment was slowed down. Now when they have to provide more retail and small credit, they don’t have the manpower.
  • Priority Sector Lending norms were totally diluted.
  • The State/District Credit Plans and Potential Linked Credit Plans have become rituals.
  • Genuine restructuring of loans were also completely stopped except for MSMEs.
  • Through NCLT corporate loot is taking place and there is a trio of retd judges, resolution agents (retd bankers & CAs) and industrialists who make it possible to write off huge debts and help the corporates which availed the credit to get away and another set of corporates buy the companies at cheap rate with bank loans again.
  • Now the pandemic has changed the entire system. Primary, secondary and tertiary sectors- all of them are down.
  • At this point we require new ideas, revival of certain successful ideas which worked well earlier and a total revamp of the economy.
  • With GST, states do not have any way of mobilizing taxes other than by selling liquor, increasing registration charges, house tax, water tax and transportation charges. So there is a need to have a relook on finance for the states. In fact the banks are flushed with cash which could help the states very easily if the decision is taken by the Centre.    

The finance sector has the following agencies:

  1. Chit funds, Nidhis and informal/formal money lenders, SHG Federations.
  2. Primary Agriculture Co-op Societies.
  3. Co-operative Banks
  4. Regional Rural Banks, Postal Bank of India and Post office savings accounts
  5. Non-Banking Finance Companies & MFIs
  6. Private banks
  7. Public sector banks
  8. DFIs like NABARD, SIDBI, IFC, NHB.
  9. State and Central Finance Corporations like Tamil Nadu Industrial Investment Corporation (state) and Power Finance Corporation (central)
  10. Small finance banks and payment banks.
  11. Financial Technology Companies (Fintechs)
  12. Angel Investors and Venture Capitalists.
  13. Insurance Corporations/Companies who mobiles huge funds and lend / invest.

What we need is to redefine the role of these institutions. Revamp some of them like PACs and Co-operative banks, create new institutions like KVIC Bank, MSME Bank, redefine the role of states/districts/blocks in planning credit and implementations. Fix a different criteria/norm for assessing the success of banks instead of the only parameter called profit.

On the other hand Indian Banks Association is discussing creation of a Bad Bank which is a bad idea. That will once again help siphoning off credit legally.

Unless the directions for credit change towards the larger majority instead of miniscule minority after the pandemic also there will be increasing inequality only.

For that change we need to revamp the credit system and have more bank branches, more staff and change of policies. This needs discussions, debates and a will to change.

Thomas Franco is former General Secretary of All India Bank Officers’ Confederation.

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