Sansad TV Perspective: Budget 2022-23: Pace of Banking Reforms

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: Budget 2022-23: Pace of Banking Reforms

Anchor: Teena Jha

Participants: 

1. C.M. Vasudev, Former Finance Secretary, GoI
2. Dr. Charan Singh, Former Chairman, Punjab & Sind Bank
3. Bikash Narayan Mishra, Senior Advisor, Indian Banks’ Association

Context: 

The banking sector in India has sustained the hour of crisis and is currently showing considerable signs of recovery. This observation gathers momentum as the Union Budget 2022 is about to get released within a short period of time bringing into focus the reforms that are expected to strengthen the banking sector

Signs of Recovery in the Banking Sector:

• The bank credits have increased from 6% in 2020-21to 7.3% in 2021-22.
• The Non-Performing Assets (NPA) of the banking sector have declined to Rs 8.5 lakh crore. This was enabled by the government’s 4Rs strategy: Recognition, Resolution, Recapitalisation and Reforms. 
• The net profit of Public Sector Banks increased to Rs 14,000 crore in the first quarter and rose to Rs 17,000 crore in the second quarter.
• Private Sector Banks like HDFC, ICICI and Kotak Mahindra experienced significant profits along with the reduction in bad loans.
• The improvement in financial performance coupled with the new Public Sector Enterprise policy has created strong grounds for the privatization of public sector banks which was a long-pending reform. 
• The capital adequacy ratio of public sector banks increased to 14.3% at the end of June 2021 along with the rise in provision coverage ratio of PSB to an 8 year high of 84%.

Read in detail about the Financial Stability Report in the linked article.

Government Interventions:

• The new Public Sector Enterprise policy – This policy classifies public sector enterprises into strategic and non-strategic sectors. 

Strategic sectors include:

• Atomic energy, space and defense
• Transport and Telecommunications
• Power, Petroleum, Coal and other minerals
• Banking, Insurance and financial services

Exceptions: The policy would not be applied on: 

• Major port trusts, Airports Authority of India and undertakings in security printing and minting.
• Public sector enterprises and Central Public Sector Enterprises (CPSE) that assist the vulnerable groups. 

Process of Privatization:

• • The NITI Aayog will recommend the PSUs that shall be considered for privatization, merger or closure. 
  • The recommendations will be considered by the Core Group of Secretaries on Divestment (CGD) headed by the Cabinet Secretary.
  • The final approval will be given by an alternative mechanism which includes the Finance Minister, Ministers for Administrative reforms and the Minister for Road, Transport and Highways. 
  • The Department of Investment and Public Asset Management (DIPAM) can approach the cabinet for the disinvestment of a PSE.

• Merging of Banks: There have been instances where the merging of banks resulted in the better performance of the public sector banks. 
• • The profitability of the State Bank of India into which five associate banks of SBI and Bhartiya Mahila Bank were merged, increased with betterment in performance. 
  • Similarly, Vijaya Bank and Dena bank which were merged with Bank of Baroda witnessed improvement in functioning. 
• During the tough times of the pandemic, there was collaboration between banks and the government supported the industry and business by relaxing norms, introducing several policies, flow of funds and so on. 
• Under the Emergency Credit Line Guarantee Scheme which was backed by the Central government (100% guarantee), banks and the Non-Banking Financial Companies (NBFC), sanctioned loans amounting to Rs 2.97 lakh crore to extend financial assistance to small, medium and micro-enterprises. 
• During the pandemic, this scheme was expanded to help the healthcare sector and cater to the demands of medical infrastructure.

Read more about the Emergency Credit Line Guarantee Scheme in the linked article.

• The Credit Outreach Programme: Under this programme by the government, the banks will set up special camps in order to provide financial assistance to eligible borrowers. This has circulated money in the market and revamped economic growth. 

Challenges in the banking sector:

• The existence of bad loans poses huge risks for the banks to operate affecting the asset quality.
• Inadequate Capital
• Lack of proper technological interventions in the public sector banks
• Improper balance sheet management
• The banks listed under the Prompt Corrective Action have limited lending and deposit-taking capacities. This stagnates the growth of such banks.

Bank Reforms: Way Ahead

• There is a possibility that the Banking Laws (Amendment) Bill might be introduced in the upcoming budget session. This bill will have provisions to bring down government holding in the public sector banks from 51% to 26%. 
• Experts recommend an increase in the effectiveness of the regulatory bodies to monitor the performance of the banks irrespective of the government’s holding on the banks. This will serve the larger interests of the public. 
• The banks must be equipped with proper and stringent measures to prevent the impact of influential businessmen and people with corrupt intentions that creates enormous losses for the banks. 
• The Standing Committee on Finance suggested the RBI to offer a roadmap for the banks listed under PCA to come back to normalcy. 
• Experts recommended an increase in the resources of the National Company Law Tribunal to deal with the disputes related to larger NPA and speed up the process of resolving such cases. 
• There should be more rooms for the privatization of public sector banks to ensure better management and smooth functioning. It will also reduce the liabilities of the government. Therefore, privatization of the banks is looked upon by many as a big ticket reform. 
• It is also expected that there will be policies to expand the digital intervention to increase the accessibility and affordability of the banking services among the deprived sections of the society. This can be done by incorporating mobile banking services in the public sector banks. For instance, the JAM Trinity played a revolutionary role in direct benefit transfer of the welfare schemes. 
• The existing gap between the people living in remote areas and the banks needs to be addressed.
• As the banking sector is at the cusp of recovery, it is anticipated that the Union Budget will bring about necessary reforms that would facilitate an inclusive economic growth and lead India towards progress which is in alignment with the vision of Atmanirbhar Bharat. 

Read about Banking Sector Reforms in the linked article.

Read more summaries of Perspective in the link.

Perspective: Budget 2022-23: Pace of Banking Reforms:- Download PDF Here