Indian Banking – Pivot for India’s Economic growth

It is pandemic time now. World is facing a severe challenge to save lives. Covid-19 has gripped the globe like an octopus. Economies of nations are contracting. Livelihoods of human beings are being impaired. Policy makers are fire-fighting. Light at the end of the tunnel is still translucent. Situation is disconcerting. 

Amidst this dismal situation, banking sector in India has been rendering yeoman’s service. Lockdown did not affect banking services in India. This is a matter of national pride. It is bankers who are keeping the wheels of economy moving in most trying circumstances. Whilst doctors are saving lives, bankers are fire-fighting India’s economy. From petty cash transaction to international banking, India’s bankers are serving silently. I salute our doctors and bankers for the magnificent services that they are rendering !   

 How crucial banking industry in India is can be gauged from simple statistics. Today total banking business is about Rs.240 trillion, which far exceeds India’s projected GDP figure of Rs.225 trillion, budgeted for the financial year 2020/2021. Out of Rs.240 trillion, Rs.140 trillion accounts for liability (deposits), and about Rs.100 trillion constitutes assets (loan/advances). These figures underscore the critical role banks in India have been playing for galvanizing growth and nation building. If India’s banking sector is robust, then our economy remains safe. This has to be ensured at all costs.

About 1.5 million banking personnel (at all levels) presently handle a business of Rs.240 trillion rupees. Which means, each employee, on an average, handles a business of Rs.16 crores. Enormous responsibility is thus bestowed on each bank employee. The first policy that has to be immediately framed and implemented on a national scale is : human resource development and imparting training. Raw material of banking business is money and human beings handle them. This task is delicate, responsible and specialized. Unless the primary focus shifts to imparting rigorous training and planning out career advancement for each 1.5 million bank employees, we shall see recurrence of frauds and  massive scams that are surfacing periodically for decades. These have caused enormous damage to banking industry. India cannot afford another banking scam. Policy makers ought to wake up and invest heavily on manpower planning and training banking personnel. There is no short cut or escape from this imperative. Most bank frauds and scams have taken place due to miserable failure of training system.  

Presently, banks are loath to lend although they are flush with funds. This is a paradoxical situation. And is indeed ironic. Banks apprehend that due to Covid-19 and lock down, the borrower’s repaying capacity has waned and therefore it is risky to lend now. Non-Performing Asset (NPA) situation, in any case, is likely to worsen in the next quarter, apprehend bankers. Such an approach is cause for concern. Nursing a borrower in distress is a very important function of a banker. This must not be shirked. Besides, this would impair bank’s profitability. Banks must lend in the normal course of business.  Impeding lending adversely affects economy as a whole.

Another undesirable practice has surfaced during this Covid-19 time. Large corporates have, reportedly, choked funds to MSME sector despite easing of bank credit system. Large corporates ought to be a little more sympathetic towards small business, and should refrain from extracting long credit period despite sufficient liquidity. If Covid-19 pressure is hitting large corporates, the same is hitting the MSME sector even more. 

It has also to be remembered that MSME sector is the second largest employer in India after the agriculture sector. And the percentage of NPA of MSME sector is half of that of other corporates. Therefore, overriding responsibility is bestowed on large corporates to nurse, not exploit, the MSME sector. If large corporates delay payment to MSME sector beyond the period prescribed under the MSME Act, 2006, then the tax deduction claimed by large corporates should be disallowed. Large corporates would continue to exist and weather the Covid-19 storm, but can the same be said with certainty for MSME sector ? Who will supply material and services to large corporates if MSME sector is choked and gasps for liquidity ?

Somehow, fiscal stimulus provided by the Centre to the MSME sector has hardly been of any significance, if at all. Direct victim of this situation could well be banks, apart from this affecting adversely livelihood of millions. In this crisis the Centre would do well to note that banks need every support from every quarter. Support to MSME sector would also mean support to their bankers. Somehow, the critical importance of MSME sector towards India’s economic growth and social justice does not seem to have been grasped by policy makers. This is unfortunate. 

Another highly undesirable trend that must be stopped forthwith is investigating agencies breathing down the neck of bankers. Every NPA does not mean criminal offence, as is the wont of investigating agencies to impute. Damage done to India’s banking system by investigating agencies has been incalculable. What will a Police official or CBI official or ED (Enforcement Directorate) official know about technical feasibility, economic viability, discounted cash flow, or a forward contract ? Reserve Bank of India is best positioned to inspect these aspects and suggest remedial measures.  Will investigating  agencies know that credit decisions  in banking always entails furthering business and this inherently bristles with some calculated  risks ? Does it follow that every time in retrospect they are entitled to sit as appellate authority to sully a banker’s reputation ?