Senior Economic Analyst
India’s banks have been in severe trouble, largely due to the condition of public sector banks that accounts for almost two-thirds of their business. This is extremely bad news as with no vigorous banking industry prepared to disburse loans, there’s not much expectation of a strong financial recovery.
There are two chief methods by which this scenario can be successfully countered. One would be to do something to equip both the public sector banks with a different mindset so they take a new and more liberal way of lending from the future. Another is for the authorities to initiate a potent fiscal stimulus.
Alas, the prognosis on the fronts is dim. The condition of the doubts and banks on what they can do stems in the RBI’s latest fiscal stability report that says the bad debts (gross profits assets) scenario of those public sector banks will be very likely to worsen by the conclusion fiscal 2020 amount of 11.3 percent of assets into 15.2-16.3 percent in a year’s period (end of fiscal 2021). The corresponding amounts for many banks are reduced — from 8.5 percent to 12.5-14.7 percent.
The worst-case scenario comes from the fact that almost 70 percent of those loan publication of public sector banks is below moratorium (repayment permitted to be ceased for six months from the RBI due to the cessation of industry brought on by the lockdown). When the moratorium ends, those who have been getting a toast will fail to cover up, sending the poor debts amount greater. The report is forthright in admitting the near-term prospects are ‘severely impacted by lockdown-induced disruptions… diminishing consumer confidence and risk aversion.’
The only method in which the public sector banks may quickly pick up the gauntlet and begin committing is by feeling assured their loan decisions will be modulated by a professional high management that does not accept orders from anybody out — bureaucrat or politician. However, this hope can’t be built every day, however often that the Finance Minister makes reassuring statements.
Not able to provide the public sector banks some substantial amount of freedom, the significant thought the government is presently owned with would be to radically lower their footprint. Based on news reports, the government has decided to privatise roughly half of those 12 public sector banks. The remainder is going to be the big banks with which many smaller ones are merged.
There’s not anything wrong with privatisation as that can guarantee market-driven functioning. Many new-generation private sector banks do very well and behaving responsibly by raising new capital to look after the blow being handled from the coronavirus pandemic.
Nevertheless, the major issue is if this is the ideal time to opt for a huge disinvestment procedure. Even the stock markets are really buoyant and the indices are near their March summit after recovering from the lockdown dip. However, just how long is it likely to continue? Analysts and investment advisers are confounded by how the markets have transferred in a time when each of the signs coming from the actual world are unfavorable.
In reality, some view a bubble in the making and also so are drawing on parallels with the dot-com bubble which arose at the beginning of this century. Like all bubbles, which one burst. If this should occur when the government is at the center of the disinvestment process, which generally stretches over a few months, then the marketplace will bring down the disinvestment exercise combined with itself.
So, the main point, so far as banks are concerned is — no expectation of advancement in loan delivery and every chance of the situation getting worse once the moratorium ends. Plus, even if disinvestment goes through smoothly, no one will bet that the new owners of the privatised banks will immediately start lending to revive the economy.
Thus there is little hope that the banking sector, or for that matter the entire financial sector, will come forward to put money into the hands of the poor and small businesses, to begin with, to start the process of an economic revival, and then energise the medium enterprises to take the process forward.
We are therefore left with no choice but to turn to the government for a fiscal stimulus to revive the economy and put it on the path of a semblance of growth. Here we are confronted with the latest thinking within the government, articulated by the Chief Economic Adviser of India. He has said a fiscal stimulus would certainly come and the right time for that would be after a vaccine for the coronavirus is available. But would an external stimulus at all be necessary as people would at that time feel confident to come forward and spend on their own?
He may retort that the operative word his statement was ‘discretionary’ spending. People don’t go in for it unless they are sure of this future. They just save. Look at those rising balances in the Jan Dhan accounts. This brings us back to the question: what are we doing to put some spending power in the hands of the poor and tiny companies so that demand can start to revive? This cannot wait to a vaccine as without minimal buying power, their bad will starve.