By Devidas Tuljapurkar
The Indian banking sector is in deep crisis. The banking system has had no direct exposure to the subprime mortgage assets or to the failed institutions. It has very limited off balance sheet exposure. Secondly India’s growth is driven predominantly by domestic consumptions and domestic investments.
However with the advent of globalization, India’s two way trade, that is trade globalization, financial integration with the world which includes Indian corporate sectors’ access to external funding, India has been hit by the crisis. Despite India not being fully globalised, problem has been affected due to external shocks and d o m e s t i c vulnerabilities.
The Indian Financial system largely escaped unhurt from the 2008 global crisis with the intervention from regulator that is RBI but it is difficult to ascertain precisely. It is likely that sizeable portion of today’s huge NPA can be traced back to the projects undertaken before 2013 when false sense of security was being given that Indian economy and finance is immune to global shocks.
On this background present data on NPA is revealing.
- 2000 to 2010, growth in NPA was minus 6.20 per cent while 2010 to 2015 it was plus 365 percent and in 2015 to 2018 it was plus 221per cent.
- 2009-10 to 2017-18, addition in NPA is 18,84,507 crore.
- 2009 to 2018, Banks have provided 8,80,277 crore towards NPA out of profits
- 2010 to 2018 Banks have written off bad debts amounting to Rs. 4,23,428 crore. Present figure of NPA Rs. 8,42,291 crore. is excluding figure of write off.
- In top 12 NPA accounts amount involved is Rs. 2,53,729 crore which is more than 25 per cent of total NPA.
This revelation of NPA largely came on surface\ only after Asset Quality Inspection by RBI at the instance of the then Governor of RBI Raghuram Rajan. It is not an overnight addition in NPA, which till this time were suppressed by resorting to policy prescription provided by the same regulator that is RBI such as Corporate Debt Restructuring which commenced in 2001 and Strategic Debt Restructuring which commenced in the year 2015. Development Financial Institutions like ICICI and IDBI were converted into commercial Banks consequent upon which corporate was left with no other choice than to approach to commercial Banks for their need for long term funding for infrastructure and core sector projects more particularly consequent upon credit crunch in global market due to Global Financial Crisis. Thus it can be fairly concluded that the present crisis in Indian Banking has its roots in the Global Financial Crisis and precisely this is impact of the crisis on Indian Banking System.
This impact is not only circumscribed to NPA but overall Indian Banking is passing through one of the worst crisis in the history. Since last three years Banking in public sector is almost stagnant. Of 21 Public Sector Banks only two banks are showing profits. With the continued losses, capital of those banks is eroded. Thanks to central government with whose support those banks are surviving. It can be perceived that overall situation in Indian banking more or less is similar to US in 2008. As stated in Financial Stability Report by RBI of total credit, in the corporate shares of 55 percent, 86 percent is NPA. This indicates that present crisis in banking is the crisis with the corporate who have borrowed from the banks disproportionately by resorting to lapses in the system and also to so called imaginative and innovative financial instruments, products and services.
While big bang financial sector reforms could not be pursued through mainly because of opposition from left parties and Trade Unions, incremental liberalization and integration with the global financial markets continued in India. The reason why India has not witnessed financial crisis as is witnessed in US or elsewhere is mainly because the Indian financial system is far more regulated and public sector dominates the market.
However policy makers in India are pursuing consistently to follow the path of liberalization, globalization and privatization in all spheres of the economy including finance and banking. The present crisis erupted in IL & FS is the live example wherein ultimately government was forced to intervene and postpone the crisis. May be this crisis will precipitate in NBFC and Mutual funds and possibly with this entire financial sector once again may have to pass through rough weather.
The Indian economy is more connected with the global financial system today than it was decade before. The exposure to FII has increased drastically which tends to be volatile making the economy more vulnerable to any external shocks.
There is a trust among the people in the country about the strength of the banking system mainly because public sector banking dominates the scene. Thus despite majority of those having booked the losses public continues to have faith in them. Here it is the public sector character which matters and not their capital or compliances with BASEL or otherwise. Now present political dispensation at the centre is taking position contrarily and is initiating the discourse in favor of privatization instead of recovering huge NPA and thus to strengthen Banking which may prove to be disastrous. (IPA Service)
The writer is Joint Secretary of All India Bank Employee Association (AIBEA)