Banking Reforms: From Serving Old Wine To Making Seminal Changes

The last column of every year typically deals with the year that was. I would have loved to do that. By any yardstick, 2018 has been a tumultuous year for Indian banking. It started with the Reserve Bank of India’s (RBI) February 12 midnight circular which has changed the way banking is done, forever. This also sowed the seeds of discontent in the government. What followed was an exhibition of rancour both by the finance ministry as well as the banking regulator, leading to governor Urjit Patel’s resignation on “personal” grounds. 

There were other interesting developments, including diamantaires Nirav Modi and Mehul Choksi fleeing the country after drilling a $2 billion hole in Punjab National Bank’s balance sheet. All these overshadowed the great Indian asset sale, driven by the banks’ relentless recovery drive.

Instead of a rewind of the year gone by, for a change, let’s take a look at the status of the banking sector reforms undertaken by the Bharatiya Janata Party-led government in the past four years.  

Pahle India Foundation, a policy think tank, has recently documented all policy announcements made by the incumbent government and even graded them on the basis of their implementation and scale, among others. I am focussing only on the banking sector. 

1. While preserving the public ownership, the capital of public sector banks (PSBs) will be raised by increasing the shareholding of the people in a phased manner through the sale of shares through common citizens of the country (Budget 2014-15).

Have we heard anything on this? 

2. Consolidation of PSBs to improve their health. (Budget 2014-15)

There has been some progress on this. The associate banks of the State Bank of India, the nation’s largest lender, have been merged with the parent – but that’s a family affair. We need to see how the merger of three banks – Bank of Baroda, Dena Bank and Vijaya Bank – pans out. 

3. A structure will be put in place for continuous authorisation of universal banks in the private sector... The RBI will create a framework for licensing small banks and other differentiated banks. (Budget 2014-15)

By putting universal bank licence on tap and giving licences to a set of small finance and payments banks, the RBI has created an infrastructure for meeting credit requirements of small businesses and low income households and deepening financial inclusion. Of course, there is a long way to go.

4. The Insolvency and Bankruptcy Code, 2015 -- introduced in the Lok Sabha on December 21, 2015, and passed by both Houses of Parliament in May 2016. 

The first insolvency resolution order was passed in the case of Synergies-Dooray Automotive Ltd on 14 August 2017. There are many glitches and most cases are taking much longer than what they should but no one can deny this is a very aggressive insolvency law, sending corporate defaulters scurrying for cover.

5. The postal department to set up its own payment bank. (Budget 2015-16)

Not too many are aware what the India Post Payments Bank is up to. After a two-centre pilot project which ran for 19 months, the bank was formally launched in September. It wants to use 155,015 post offices as access points and 300,000 postal service workers to doorstep banking services. Let’s wait and watch.

6. Larger non-banking finance companies with at least Rs 5 billion in assets to be considered ‘financial institutions’ and covered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act 2002. (Budget 2015-16)

This has been done, empowering NBFCs to recover smaller bad loans.

7. An autonomous Banks Board Bureau (BBB) to be set up for selecting the heads of PSBs and helping them develop strategies to raise capital. This is an interim step towards setting up a holding and investment company for banks, as recommended by the PJ Nayak Committee on governance in PSBs. (Budget 2015-16)

The BBB has been set up and is more than three years old now but it’s nothing but a glorified appointments committee; on occasions its recommendations are rejected by the finance ministry. 

8. A new credit rating system for infrastructure projects which gives due emphasis to in-built credit enhancement structures instead of relying on standard perception of risk, often leading to mispricing of loans. (Budget 2016-17)

Most rating agencies have developed the framework based on the ‘expected loss’ methodology, taking into account the probability of default and the prospects of recovery. Is more money flowing into the core sector? 

9. The RBI Act, 1934, is being amended to put in place a monetary policy framework and a monetary policy committee (MPC) through the Finance Bill 2016. (Budget 2016-17)

The MPC is in place for two years now with the mandate of flexible inflation targeting. The monetary policy is no longer a one man’s (read RBI governor’s) policy; it is decided by a six-member panel.

10. Amendments in the Sarfaesi Act 2002 permitting 100 per cent foreign direct investment in asset reconstruction companies (ARC) under the automatic route and foreign portfolio investors to hold up to 100 per cent of the security receipts (SRs) issued by a scheme of an ARC. (Budget 2016-17)

This has been done partially. The ARCs are attracting foreign investment but the definition of qualified institutional investors has not been worked out for buying SRs.

11. A proposal to on-board PSBs and corporations on the Trade Receivables electronic Discount System(TReDS) platform and link it to Goods and Services Tax Network (GSTN). This is to facilitate financing of invoices and bills of MSMEs drawn on corporate buyers by way of discounting by financiers. (Budget 2018-19)

Not too many PSBs have joined this platform yet despite the recent noise on MSME financing.

12. Allowing regional rural banks to raise capital from market. (Budget 2018-19)

A non-starter.

Quite a few of them are cosmetic changes while the BBB is old wine in a new bottle. Two seminal reforms during the past four years have been the insolvency law and MPC. The fledgling insolvency law, despite all the hiccups, has redefined the banker-borrower relationship and the MPC, the making of monetary policy. But the one-year extension to the CEO of Bank of Baroda makes one wonder how serious is the government about consolidation in PSBs. The six-month tenure of the IDBI Bank chief also smacks of the same ad hocism.

This column first appeared in www.business-standard.com / Business Standard.

To read the author’s previous columns, please log onto www.bankerstrust.in

The columnist, a consulting editor of Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. 

Twitter: @TamalBandyo