The Indian Banking Sector,

2017: Public Policy

Challenges
Presented by:
Group-4
Ronit Raj
Vinay Krishna
Hameedha Roshan
 Trouble in Banking Sector
• Banking sector reforms in India(1991 & 1998) had improved the banking
system, NPAs and Asset Quality.
• Shri S. S. Mundra delegate governor of the RBI -dwelled upon the arising
difficulties for the Indian Banking Sector.
• Raghuram Rajan former governor of the RBI - pointed out some of the
major challenges for banks in India.
• NPAs were by far the biggest threat to the banks.
 The Performance of Indian Banks
• The performance indicators of Banks - Return on Equity, Return on
Assets, Credit Deposit Ratio, and Net Interest Margin.
• Return on Assets helps in measuring Bank’s Operating Profit.
• Shareholders’ Rate of Return
• Net Interest Margin - Important criterion for the performance of banks as
their main source of income was Interest Income.
• Credit Deposit Ratio
PERFORMANCE INDICATORS
( DATA FROM 2014 TO 2016)
 NET INTEREST MARGIN
3.37% 3.45%
3.31%
3.50%
3.00%
2.28% 2.15% 2.06%
PERCENTAGES

2.50%
2.00%
1.50%
1.00%
CREDIT DEPOSIT RATIO
0.50%
0.00% 86.36% 90.30%
1 2 3 100.00% 84.37%
90.00% 74.29% 73.77% 71.38%
YEAR 2014 -2015 - 2016 80.00%

PERCENTAGES
70.00%
60.00%
NATIONALISED BANKS PRIVATE SECTOR BANKS 50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1 2 3
YEAR 2014 - 2015 - 2016

NATIONALISED BANKS PRIVATE SECTOR BANKS

NPA IS THE BIGGEST PROBLEM FOR BANKS
SOME OF THE REASONS ARE :
 GDP
10 9.32 9.32
9 8.59
8 7.6
7.2
7 6.72 6.6
6.21
6 5.6
INDIA’S GDP

5
4
3
2
1 Gross NPAs to Gross Advances (%)
0
1 2 3 4 5 6 7 8 9 2.83%
YEAR 2008 - 2016 3
10.69%

YEAR 2014-2015-2016
2.10%
2
5.26%

1.78%
1
4.09%

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%

NPA

PRIVATE SECTOR BANKS PUBLIC SECTOR BANKS

 POST-CRISIS MACRO ECONOMIC
SCENARIO:
• The GDP growth fell to 6.7% in 2008-09 from 9.3% in 2007-08 due to the
global recession that started from USA
• To manage liquidity position RBI cuts the CRR rates and repo rates to
almost half of what it was
• This was done to tackle the increasing inflation as it was also in double
digits in 2009-10.
• BOP was also worsened in 2012- 13.
• Stressed assets , NPA’s in Indian commercial Banks were caused due to these
Macroeconomic factors.
• As to increase money supply in the economy, RBI eased the lending and that
loans later became Bad loans or what we can say is NPA.
• Slow economic growth, recession, inflation, slow recovery of economy, an
uncertainty in global economy is the reasons of NPA increasing
• Demonetization in 2016, was also feared that it would lead to increasing
NPA’s and affect the debt repayment capacity of small enterprises.
 MISMANAGEMENT & POLITICAL
INTERFERENCE:
• Corny Capitalism and Political interference was as equal responsible for
these increasing NPS’s.
• Loans were sanctioned by the authorities without proper verification
• Governments pressure to invest in projects that are not feasible and leads
to money get blocked and NPA’s
• Sanctioning of loans to the own people is also a practice which has costed
banks at large.
• These surge in the bad loans has eroded the profitability, efficiency of the
banks
• Government ownership of banks have always been questioned for the
growing NPA’s.
• Banks crippled with high NPA’s could face capital crunch as their capital
may get eroded
• Recapitalizing the banks is done by the government to support banks , but
this cannot curb the issue until the interference is reduced.
 OTHER REASONS:
• Restructuring of loan facility was extended to companies that were
facing larger problems of over-leverage & inadequate profitability. This
problem was more in the Public sector banks.
• Lack of Contingency Planning: Banks did not conduct adequate
contingency planning, especially for mitigating project risk. They did not
factor eventualities like failure of gas projects to ensure supply of gas or
failure of land acquisition process for highways.
• Historical factors -Between early 2000’s and 2008 Indian economy were
in the boom phase. During this period Banks especially Public sector
banks lent extensively to corporate. However, the profits of most of the
corporate dwindled due to slowdown in the global economy, the ban in
mining projects, and delay in environmental related permits affecting
power, iron and steel sector, volatility in prices of raw material and the
shortage in availability of. This has affected their ability to pay back loans
and is the most important reason behind increase in NPA of public sector
banks.
• Weak Law & Measures: Poor law enforcement and faulty regulatory
measures in checking the ingenuity of the borrower. Lags in due diligence
and analysis carried out by the banks before sanctioning a loan.
ROADMAP AHEAD
 The Immediate task of
resolving the current
accumulation in the
Two major components PSBs.
in resolving the NPA
problem The more important
long-term task of
ensuring that NPAs do
not accumulate again to
this proportion.
 Resolving the Current Accumulations

• Recapitalization in various forms such as Budgetary allocations or Issue

of Equity Shares or Recapitalization Bonds in the Market, and any other
kind of finance mobilization by the government and the PSBs over a long
period of time can clean up the balance sheets.
• Given the significant volume of the NPAs, this may take time, but
sustained effort to eradicate these risky category credits can make the
Banks Balance Sheets healthy again.
• Impact of recapitalization could be bad on fiscal deficit of India as it may
increase the fiscal deficit gap and could reduce GDP by at least 1% by
various studies.
• This is also critiqued that this process is just like covering up the large
borrower's default by penalizing the public. After all, any money infused by
the government ultimately originates from tax and other revenues collected
from public of the nation.
• Recapitalization can give some breathing space to the banks for some time.
But the need is to correct the root problem.
• Thus, we get into much important issue of long-term solution for the NPA
problem.
 LONG-TERM PLANS

• Privatization of Banks might help Public sector Banks in achieving

higher profitability, better services or induce competition but would not be
much effective in reducing fraud or undue risk.
• Social objectives of the banks might get hampered by wholesale
privatization of all Public Sector Banks.
• Merger of unhealthy banks with healthy banks which is being carried out by
the Government of India as a potential solution for NPA problem.
• This merger might help in reducing of higher risks of unhealthy banks, but it
could also have negative effect on the Balance Sheet of the healthy bank.
• Other solution is establishment of a Bad Bank and transfer all the NPAs and
Doubtful Assets to that bank so that commercial banks can freshly restart the
borrowing with better regulations and controls.
• Instead of transferring to Bad Bank, Stressed Asset Funds can be created
where distressed assets would be bought by investors.
• The model of financing big-ticket projects through deposit-taking commercial
banks must be scrutinized and alternative modes of financing must be
explored.
• A new-age Development Finance Institution (DFI) model for big development
projects, utilizing new financial avenues such as the sovereign wealth funds
and different versions of capital, bond and equity funds.
• Risk in development financing comes from the long gestation period of the
projects.
• The projects can get stalled for many reasons such as technological
obsolescence, market competition, change in government policies, natural
calamities, poor management, or even a drastic fall in demand.
• Thus, instead of funding such projects by Commercial Banks, DFIs could be
the provider of loans in long-term investment projects.
• This DFI model, instead of funded by Government can be funded using
private funds where capital and equity can play a larger role or through
Project Financing by creating SPV etc.
• Such a revamped DFI will take the responsibility of funding big investment
away from commercial banks, freeing them from the recurring bad loan
accumulation.
• This can usher in a better, more structured system of risk assessment and
finance management for these big long-gestation development projects.
• Biggest problem with the NPA’s is that they cause “Twin Balance Sheet
Problem”. Government by improving the performance of economy can boost the
health of the businesses in the economy there by improving the health of the
Bank’s Balance Sheet as well.
• Banks must put in place a robust mechanism for early detection of signs of
distress, and measures, including prompt restructuring in the case of all viable
accounts wherever required, with a view to preserving the economic value of
such accounts.
• Management of concentration risk of a bank that is, excessive exposure to any
business group, sector, geography, etc., must also be properly monitored by the
RBI with proper guidelines and regulations.
• RBI and Government must make sure that there would be no Political
interventions in the decisions of the Banks.
Thank You