Lenders need to practice banking in a transparent and responsible manner

Finally, the banking sector seems to be inching towards regaining its health with gross non-performing assets (GNPAs) showing compression in both private and state-run banks. A tumultuous year, which was marked by a spate of controversies, came to a close with the Reserve Bank of India (RBI) reporting a concomitant improvement in debt provisioning coverage ratio during the first half of FY19.

For the first time since 2015 GNPAs declined to 10.8 per cent from 11.2 per cent in H1FY19, which perhaps marks the beginning of a new phase for the Indian banking industry that’s going through a huge overhaul.

Private banks seem to have done better vis-à-vis their state-run peers that are besieged by social obligations imposed by the government and the quasi-government organisations. For instance, PSU banks’ non-performing assets and loans continue to be high at 14.8 per cent in September. But the government-owned banks have shown a decline in NPAs vis-à-vis 15.2 per cent in March. RBI’s financial stability report also points to further reduction in gross non-performing assets to 10.3 per cent by April 1, 2019 from 10.8 per cent in September 2018.

In effect, state-run banks may have to put in more efforts to clean up and improve their credit profile. Ideally, the public sector banks will have to bring down the gross non-performing assets to a more manageable 5 per cent level.

Improvement in provisioning coverage ratio to 52.4 per cent from 48.1 per cent in March also means that banks are in a better position to meeting any contingency. There’s enough potential for banks to improve the provisioning coverage ratio further.

The bank re-capitalisation plan rolled out by finance minister Arun Jaitley over last two years with Rs 110,000 crore seems to have had its impact on lenders’ financial stability. The Narendra Modi government seems to have gone beyond call of the day by announcing another Rs 40,000 crore infusion into state-run banks. RBI governor Shaktikanta Das is right when he says banks were “on course to recovery” on key parameters like non-performing assets and provisioning ratios. However, much more needs to be done to correct the situation created by years of mismanagement. Sweetheart deals and politician-businessman nexus actually dictated lending by state-run banks. Ever greening of loans has had covered up stability issues related to banks. Excessive political interference into bank operations led to deterioration in the banks balance sheets. Under the four-year NDA rule, the government-bank equation has swung to another extreme. Given the prime minister’s unwritten directive, political interference into working of banks has declined to a bare minimum.

But the lurking fear is many of these banking industry leaders may not have known to exercise their freedom with responsibility and accountability. Otherwise, how does one explain serious irregularities perpetuated by bank CEOs in both public and private banks? As many as half a dozen bank heads have had to quit or face prosecution in the last four years.

As the RBI governor hinted there was definitely scope for better regulation and monitoring of banks by both the RBI and the finance ministry – the two key stakeholders – on behalf of small investors.

The governance reforms need not be limited to just state-run banks, which are continuously under public glare. Opaqueness in operations of private banks and foreign banks may have to go. Unlisted private and foreign banks must subject themselves to public scrutiny. This transparency and higher responsibility drive should also cover regional rural banks, cooperative banks and systemically important non-banking financial companies like IL&FS.