Find a way out of the mess and ensure that people do not lose faith in banking system

Restoring the confidence of small depositors in state-run banks that have been currently bracketed and branded for corruption and inefficiency is a key challenge. As both public sector banks and private banks have the needle of suspicion pointing at them, there is a big task ahead in building a reputation for probity and transparency as they are vital to an economy aspiring to grow in double digits. This appears to be the objective of the government and the move to drop plans for enacting the Financial Resolution and Deposits Insurance (FRDI) bill – because of misgivings over the controversial bail-in clause.

The Union cabinet’s decision on the FRDI bill is timely and relevant in view of the apprehensions of small depositors who have parked their meagre savings in public sector banks. Added to this is the fear of newly enrolled bank account holders under the Pradhan Mantri Jan Dhan Yojana. Even though the Parliamentary Standing Committee on Finance is yet to come up with its findings on the proposed bill, the Narendra Modi government moved swiftly to withdraw the legislation and put paid to the rumour mongering and lurking fear of depositors in the banks.

Politically, the Modi regime may not have been comfortable with the fact that a view had been created that the proposed legislation would negatively impact the small savings sections, its mainstay in the electoral arena, ahead of the next Lok Sabha polls and scheduled assembly elections in three states. Even now, only bank deposits up to Rs 1 lakh get the government’s insurance cover without any applicable premium liability. In the proposed FRDI bill, this insurance cover would have perhaps continued in a different way. However, there were no takers for the controversial bail in provisions. The bill had stipulated passing on banks’ liabilities during resolution process to depositors as well. Obviously enough, these norms may not be politically saleable and hence prompted the government’s damage control team to seek withdrawal of the bill.

The Union cabinet had also cleared another bill that would eventually replace the Insolvency and Bankruptcy Code (IBC) related to the Presidential Ordinance intended at tackling banks’ non-performing assets piled up at Rs 10.8 lakh crore. The government’s move to make homebuyers party to resolving NPAs of real estate companies is a welcome development. This seems intended to provide some cushion to homebuyers whose savings were stuck in real estate projects across the country while the companies concerned resorted to misappropriations or over-leveraging of their balance sheets.

Secondly, small, medium and micro enterprises will have a different dispensation while dealing with stressed loans of banks. These two concessions will lend credibility to resolving NPAs.

But, the larger issue of cleaning up the balance sheets of banks continues to be tricky. Even now, resolution of 30 high profile NPA cases is nowhere in sight. The process at best could be work in progress while much more needs to be achieved. Rampant corruption at the highest level in the banking industry exemplified by what seems to have reportedly transpired at ICICI Bank or Punjab National Bank is a larger challenge. Over a dozen chief executives or managing directors have fallen by the wayside following charges and allegations of financial irregularities under their watch. There have been murmurs within the banking industry about possible repercussions with officials not willing to take commercial calls in extending fresh loans even in genuine cases. The finance ministry, the RBI, banks, workers unions and depositors have to together find a way out of this mess and ensure people, especially those with small savings, do not lose faith in the Indian banking system.