Indian Banking Industry – At Crossroads

Contributed by: Meera Siva

Chennai chapter of IAIP organised an event on “Indian Banking Industry – At Crossroads” on 2nd July 2016. The guest speaker was SA Raghunathan. Raghunathan has over 33 years of banking experience – 5 years in regulatory banking (RBI), 15 years in industrial and project financing (IDBI and TNUDF) and 13 years in banking technology. He also worked as Vice President, Business Solutions, SCOPE (StanChart subsidiary). He is a regular contributor to business publications such as The Hindu Business Line and holds a Masters in Economics and a CFA charter.

Raghunathan highlighted various issues plaguing the sector and the road ahead. He opined that analysing the issues in the banking industry is not easy, given there is no fine-grained data available on non performing assets (NPAs). The quantum of the problem is large – SBI has INR 1 trillion of NPAs in 25 industries. It is likely that a part of the default is due to recession in some sectors – for instance metals and construction. But data indicates that nearly all sectors seem to have NPAs which points to other reasons. Nor is it the case of over-leverage on the part of corporate India. Data shows that debt is at 1.5 times equity overall, which is not indicative of high leverage. While priority sector lending may be cited as a reason for the woes of PSU banks, the NPAs in this segment are not that high.

One possible reason for the bank’s NPA situation is the structural change that unfolded as far back as 1991. During that period, many of the development financing institutions such as IDBI and ICICI moved out of long-term lending. Banks had to pick up the role played these players and lend to sectors such as infra, power, telecom and airline which need loans with tenures of over ten years.

Banks also have a sizeable number of loan accounts – over 30 lakh accounts – and it is not easy to follow-up on delays and defaults. Banks are recognizing their NPAs and provisioning for it, which will clean-up their balance sheet. As a result of this provisioning, there is public outcry on poor profitability. There is hardly any emphasis on liquidity effect of NPAs. Banks have tightened lending mainly due to the liquidity issues and their risk aversion is only a smaller aspect. They are also doing corporate debt restructuring, strategic restructuring and selling their loans to asset reconstruction companies (ARCs).

Private banks have been more active in the retail segment and their NPA situation is better in general. Private banks are also investing more in technology and it is still unclear how well PSU banks will compete with them. The role of Small Finance Banks in the banking sector is also unclear. The licensees are micro-finance institutions with a good lending network and a borrower base with a good repayment track record. However, they need to mobilize deposits. As banks, their traditional sources of funding – equity investments or loans from banks – may not be available hence; they have to find newer sources of capital that meets the regulations.

RBI has laid out a vision of a four-tier structure for banks. There will be a few International scale banks and it is likely that SBI and its subsidiaries will play this role. The next tier is National Banks, which are larger banks with presence in multiple States. The third level will be regional banks, which may be the smaller PSUs. The last tier is local banks that may be co-operative banks and small finance banks.


Leave a Reply