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WhyIndianbanksfaceaseriouscrisis
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March22,201617:19IST
IftheRBIhadmadeaonepercentratecutbackinNovember2014when
inflationriskshadmoderated,bankswouldhavemadeapproximatelyRs50,000
croreoftreasuryprofits,saysJanmejayaSinha.

TheattemptbytheReserveBankofIndia
(RBI)tocleanupbankcreditportfoliosin
onefinancialyearhasmadethisoneofthe
Latestfromrediff.com
worstquartersinIndianbanking.
InLudhiana,
manufacturing
BanklosseshavealreadysurpassedRs takesabeating
postnotesban
12,000crore(Rs120billion)andmost
bankerssaytheworstistofollowin
subsequentquarters.
'Mr.Cricket'
Husseytippedfor
AustraliaT20
Aproblemevidentbutpoorlyaddressedoverthelastfiveyearsisnowexpectedtobecleared coachjob
inoneyear.

WhiletheRBIisdirectingbankstorecogniseandwriteoffbadloansitisatthesametime
urgingthegovernmenttomaintainitscommitmenttothefiscaldeficittarget. Avillagethatlives
Modi'scashless
dream
ItisthusnosurprisethatthecapitalpromisedbythegovernmenttobanksofRs75,000crore
(Rs750billion)overthreeyearsisadropintheocean.

TheRBIdirectionsrequirebankstodealeffectivelywiththeirrepossessednonperforming Thechallengesof
assets(NPAs). branchless
banking
Theextantlegalsystemisexcruciatinglyslowandtypicallyensuresthatevengoodassetsthat
areseizedturnbadbythetimethecourtdecisionistaken.

Anyassetwhichiswrittendownandunderlitigationcan'tgetfreshlending,sosoursquickly. Rupeecontinues
goodrun,gains
Writingdownassetsnecessitatescapitalraisingatthesametimeasbankcreditratingsget another7paise
againstdollar
markeddown.

Banksthenhavetorestrictlendingtopreservecapitalandthusbadloansbecomeabiggerpart
ofashrinkingcreditportfolio. Sensextrades
flat,Niftybelow
Bankpricetobookratiosarelikelytofallbelow0.5,whichiswhattheyaretoday. 8,100

Thewellintentionedclamourtobringthegovernment'sstakedownbelow51percentin
publicsectorbanksishighlyimprobablewithoutbroadconsensus,andafunctioning
Parliament. Jayalalithaa's
conditioncritical
Apollodoctors
tryingtheir'very
http://www.rediff.com/business/report/columnwhyindianbanksfaceaseriouscrisis/20160322.htm 1/5
12/4/2016 WhyIndianbanksfaceaseriouscrisisRediff.comBusiness

SocouldtheRBIhavefollowedadifferentapproach? tryingtheir'very
best'
In2007,thefinancialsoftheIndianbankingsystemwerethebestintheworld.

Thesectorhadareturnonassets(RoA)ofoveronepercent,grossNPAsbelowtwopercent,
netNPAsbelowonepercent,costincomeratiobelow45percentandagrowthrateofassetsof
over18percent. WatchLIVE!
Oppositionvs
Governmentin
IndianbankshadescapedwhatRakeshMohanhadcalledtheNorthAtlanticfinancialcrisis. Parliament

But10yearslater,badloanstogetherwithrestructuredassetsarearound14percentofIndian
bankassets.Howdidthiscomeabout?
WhyisBCCI
TheoriginsofthecurrentbankingproblemsaroseduringtheEleventhFiveYearPlan(2007 opposingLodha
committee
12). reforms,asks
Azad
Thegovernment's$500billion(aboutRs30lakhcroreintoday'sexchangerate)pushinto
infrastructure,whenIndia'sGDPwasonlyatrilliondollars,createdafundinggapforwhich
Saiftogoon
thegovernmentsoughtsubstantialprivatesectorparticipation. paternityleave
Publicprivatepartnerships(PPPs)ininfrastructurewereencouraged,supportedbybank
lending.

DuringthePlanperiod,4,910capitalprojectsofoverRs150crorecameupbutunfortunately
2,238ofthemgotstalledduetodisputesofdifferentkindsonenvironment,land,andPPP MoneywizLive!
contractterms.
BSE26,148.67 81.99 9:00 11:53
Theimpactoftwoyeardelaysincapitalprojectsledtofullerosionintheprojectequity,andso NSE8,061.95 24.85 9:00 11:53
debtequityratiosofinfrastructurecompaniesrosefrom1.3in2008tothreein2013.
EnterCompanyorMutualFund GetQuote
Fiftypercentofbankrestructuredassetswereininfrastructure,steel,powerandtelecom TopGainerTrentLtd.+9.06ViewAll
TopLoserLICHousingFi44.94ViewAll
sectors.

Whilethereweresomecasesofrankpoorlending,itwasclearthatthesectorsshowingstress
wereimportantsectorsforIndia.

Backin2001,whenBimalJalanwasthegovernoroftheRBI,Indianindustryfacedasimilar
challenge.

GrossNPAsofbankswerearound12percent,netNPAswereclosetosixpercent,bankRoAs
were0.5andWPI(thenthetargetedindex)wasat7.13percent.

Toaddressthesituation,DrJalan,overthethreeyearperiodstarting2001,cutinterestrates
by300basispoints(onepercentayear).

Thisallowedbankstocapturetreasuryprofitswhichhelpedthemprovideforbadloans,
spurredthecreditcycle,andby2004hadcontainedthecrisis.

GrossNPAsfellto7.8percent,netNPAsto2.5percentandWPIwas5.4percent.By2007,
underDrYVReddy,thesenumbersrapidlycamedownto2.5percentgrossNPAsand1.07
percentnetNPAs.

TheRoAsofthebankingsectorroseaboveonepercentandcreditwasgrowingat28percent
despiteraterisesin2005and2006.

IftheRBIhadmadeaonepercentratecutbackinNovember2014wheninflationriskshad
moderated,bankswouldhavemadeapproximatelyRs50,000croreoftreasuryprofits,which
wouldhavebothfacilitatedearlierprovisioningandgivenafilliptothecreditcycle.

Today,withlowoilprices,anegativeWPIforoverayear,negativeinterestratesinmany
countries,andtheUSabandoningitsrateriseintent,howdoestheRBInotdoaonepercent
ratecut?

Itwillprovidethesamebenefitstreasuryprofits,provisioningspace,andafillipto
investments.

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12/4/2016 WhyIndianbanksfaceaseriouscrisisRediff.comBusiness

Matureassetswillstarttobecomeproductiveratherthanbecaughtupinlitigation.

Badloanswillshrinkasapercentageofbankcreditportfolios,creditratingswillimprove,and
withanimprovedmarketsentiment,capitalraisingwillbecomeeasier.

FurtherthepushtocashlesstransactionsanddigitisationfromtheRBIcouldhavecome
earlier,creatingincentivesforcardandmobilepaymentsandapushforPOSmachines.

Goingcashlesscanleadtoareductioninbankbranches,currencychestsandATMs.Bank
operatingmodelsneedtobereimagined.

Digitisationwillenablebetterservicemodelsatlowercostswithmuchlessphysical
infrastructure.

Unlockingexpensiverealestateandsaleofexcessbankownedrealestatecanalsohelpwith
bankrecapitalisation.

Downtheroadthequestionoftakingthegovernment'sstakebelow51percent(above26per
cent)shouldberaisedagain.

Butthecurrentapproachappearshamhanded,squeezescreditgrowth,andimpedes
economicrecovery.

AtatimewhenIndiaisoneofthefewbrightspotsintheglobaleconomythisisaselfgoalwe
didnotneed.

ThewriterischairmanAsiaPacific,TheBostonConsultingGroupIndia.Views
arepersonal.

Source:

RelatedNews:ReserveBankofIndia,WPI,DrYVReddy,BostonConsultingGroupIndia,POS

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CheckandbalancepolicyforIndianFinancialPsychopaths
byAnilBharali(ViewMyPage)onJul07,201602:32AM

ItishightimetofixtheIndianFinancialPsychopathsthroughCheckandBalancemethodsandrules.

Reply Forward|Reportabuse

ManyMallyaeatingbank,Publicmoneyneedtoexposed.
bySanjayTomar(ViewMyPage)onMar23,201606:03AM

Businessman,CorporatewhohaslinkwithpoliticianortheyarealsopoliticianlikeMallyaenjoyingthescam
lockedthepropertyforpersonalbenefit,therearemanybiosowneroftheirproperty,hiddenpropertybutmany
BusinessmanlikeMallyaeatingbankmoney,Publicmoney,stockMarketmoneyneedtoexposed.Top100
defaulterlistmustbepublictoselltheirasset,propertytorecoverloan.Businessmanhavehabittomakehidden
propertyapartfromloan,orpublicmoneytakenbankdon'tthatpropertythatisincaseofVijayMallyaorcorporate
storyissamebutneedtoexposedmanyMallyainIndia.

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Correction
byarungopalagarwal(ViewMyPage)onMar22,201605:42PM

Badloanswerecontinuingfromthelastsomanyyears,correctionwascertainlyneeded.
Onlyourconcerniswhybankscannotworkwithlowercostandlowermargin,whyinterestratetoindividualsfixed
depositsarereduced.Whyonlypeoplesuffer,whybankdoesnotsacrificetheirmargin.

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