- The banking sector is one of the crucial pillars of economic activities in the country that needs no further elaboration. The robustness of the banking sector provides an insight into how efficiently the country’s money matters are handled and also sets the tone for future growth prospects too. In this regard, the incumbent Union Government is attempting to push ahead with the much-needed reforms in the banking sector by making announcements to that effect in successive Budgets. As you are aware, a few of the public sector banks have already been merged to form big entities. And some more are in the pipeline as well.
PC: Aipc
- Against this backdrop comes the news about the amalgamation of HDFC and HDFC Bank, once legal formalities are done, will lead to a private sector banking behemoth. As reports suggest, it will result in a balance sheet size of almost Rs. 18 lakh crore, with an emphasis on mortgages and retail loans. At one level, the creation of a large bank through the amalgamation embodies the growing importance of private banks in a financial sector dominated by public sector banks. Reports mention that in September 2021, private banks contributed about 38% of the industry’s total credit, up by over 10 percentage points in five years. However, this is just a part of the story.
- Delving further will reveal how India’s banking industry has witnessed two phases over the last two decades. Between 2000-01 and 2009-10, there was growth at breakneck speed. Bank credit as a proportion of GDP ratio increased from 24% to 50%. In the next decade, as imprudent loans of boom years hit home, the credit to GDP stagnated at around 50%. We are aware of how the lost decade was marked by a slow process of first accounting for bad loans and then their clean-up. Among the tools introduced to aid, the process was the Insolvency and Bankruptcy Code (IBC) in 2016, the most far-reaching measure thus far. The report card, however, is mixed.
PC:
- Three broad trends are largely visible here. Public sector banks that were the worst hit by the NPA problem have lost market share over the last decade. Second, risk aversion because of NPAs caused by exposure to industry intensified during the pandemic. Third, the level of gross NPAs to total advances has trended downwards to stand at 6.9% at the end of September 2021. Worryingly, even before the Omicron wave and Ukraine conflict flared up, the Reserve Bank of India’s stress test showed that NPAs may rise to 8.1% by September 2022 under a baseline scenario. Nonetheless, India’s bank-dominated financial sector remains vulnerable.
- To illustrate, despite IBC and numerous private asset reconstruction companies, a state-backed bad bank had to be created last year owing to certain demands emanating from the stakeholders, including opposition political leaders. It’s still to stabilize in terms of leadership though. Looking ahead, India needs financial intermediation that can handle not just scale but also variety. Remember, it’s not merely about capital, there’s also a need to upgrade skills in the upper echelons of banking. And privatization of public sector banks can no longer be postponed. As such, the time is ripe now to push ahead with the pace of banking reforms.
