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The Banking Sector 2019: The Good, The Bad and The Ugly

14 Dec 2019

Banks are the lifeline of any country’s economy. Its development and improvement in services directly indicates the upswing in the country’s economic condition. The year 2019 has seen a lot of upheavals in the banking industry and the government’s innumerable attempts to make things right for the sector which went astray.

Here is a round-up of the good, bad and ugly of the banking sector along with damage control done by the government to help the sector recover.

The Good:

• India’s banking system has seen a paradigm shift in the form of introduction of new age technologies such as mobile devices, analytical tools, cloud computing and the use of social media. The recent push towards digital payment services has led to our country’s Immediate Payment Service (IMPS) leading the pack of 25 most financially advanced nations with a Faster Payment Innovation Index (FPII).

• The banking policies are created, implemented and monitored by the RBI along with the Finance Ministry that claims that the Indian Banking System is regulated and optimally capitalized as they have stood the test of global turmoil that led to the financial downturn.

• The revolutionary captive operations in the Indian Banking, Financial Service and Insurance (BFSI) sector have improved the method of revenue generation by these banks. Their roles are not restricted to merely financial services, but they also add value with end-to-end services like risk management, analysis and decision making and also prevent and scrutinize money laundering activities.

• Application of Artificial Intelligence enabled more banks to minimize the cost of operations and has made their service network accessible in remote locations. This has not only modernized the banking operations but raised the employment of a greater talent pool of our country.  

The Bad:

• Despite such advancements, India’s banking industry has been shrouded with a series of bad debts and losses in the recent past. History has witnessed the Great Recession 2008 where the banking industry in the United States collapsed due to a series of incorrect policies, non-control lack of scrutiny on policy implementations and wrong banking decisions over some time led to such a breakdown of the financial services leading to an ultimate economic breakdown.

• A similar set of mismanaged actions in the Indian banking industry has led to massive revenue losses, piling non-performing assets (NPAs), huge bad debts and shrinking credit facilities. This has crippled the country’s economy with shrinking investments in households and businesses, leading to low employment and economic growth.

• It is time to rethink the basic banking functions, address the flaws and take corrective actions. It is important to revisit the traditional functions of banks.

• Ideally, banks accept deposits from savers or customers for which the latter gets a return in the form of interest; these deposits are offered as loans for a higher charge to businesses and the cycle continues. The banks run the finances of the country thus circulating this money in the economy through various payment gateways.

• The complexities arise due to cross-holding banking financial instruments in between them. Hence when one bank has a downturn the related banks are impacted. This leads to a panic in the banking system drying up the credit facilities and the money evaporates in this circulation. Hence the government is forced to bail these financial institutions from the abyss which ultimately impacts the Indian taxpayers’ pockets.

The Ugly:

• Public Sector Banks like Punjab National Bank (PNB) and Union Bank of India (UBI) reported NPAs worth Rs 17 lakh crores.

• In June 2019, 26 UCBs were scrutinized for jeopardizing customer deposits, mismanagement of funds and frauds in which Punjab and Maharashtra Cooperative Bank (PCM) went bankrupt due to NPAs worth Rs 4,355 crores.

• Cooperative banks were popular among the poor first-time bank account openers who were disregarded by PSBs and other private banks due to higher deposit requirements.

• The current banking debacle is due to wrong lending decisions, lack of scrutiny or monitoring of the bank-credit system, legal flaws and internal and external geopolitical turmoil.

• A better system of clear rules of receiving deposits loaning advances and expert scrutiny and monitoring system should be in place for reinstating the glory of the Indian Banking System. There should be a panel of leading experts who will monitor and allocate the funds as loans based on capital productivity.

• The central bank and a few large sectoral banks should deal with open market operations along with transacting securities, reserves, and assets. They should also handle the monetary policy simultaneously as this enables better calibration of credit supply in the market. Payment banks should only act as a payment gateway and should not be allowed to handle deposits.

Government’s Damage Control:

The Government has taken various corrective actions to reduce the incidence of fraudulent activities with severe consequences for such actions.

• Pumping in of Rs 20 lakh crores (USD 286.16 billion) to stabilize the country’s banking industry and restrict the slowing economic conditions, as a part of the Union Government’s budget for FY19-20

• Offering Rs 6 lakh crores (USD 93 billion) in loans to benefit 120 million people in Mudra Scheme.

• Raising money upto Rs 1 lakh crores (USD 14.3 billion) in the form of Pradhan Mantri Jan Dhan Yojna.

• RBI also set up the Public Credit Registry (PCR) which is an exhaustive credit-holders’ data that is available to the stakeholders.

• The Insolvency and Bankruptcy Code Ordinance Bill was passed in 2017 to monitor the activities of banking, non-banking, microfinance and other financial institutions. As per RBI data, banks’ credits rose to 8.07% which is Rs 98 lakh crores, bank deposits grew to 9.9% amounting to Rs 130 lakh crores from the last year. Loans to the agricultural sector rose to 7%, personal loans improved to 16.6% and that in the industrial sector reduced to 7.3% from last year.

However, the impact of the above measures on the banking system and the economy can only be understood at a later stage in this financial year.

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