Looking back to the 1991 crisis:
Less than three decades ago, during 1990-91, the Indian financial sector was on the verge of collapse due to a host of factors. To take a quick recap, the country’s macro-economic situation was in a shamble; the Gulf crisis had pushed up the oil prices with a cascading effect on the Indian economy; the fiscal deficit was as high as 10%; foreign exchange reserves had shrunk to a dangerously low-level exposing India to a risk of default in its international debt obligations. Two years of political instability had brought in a near policy paralysis. The new government headed by PV Narasimha Rao which took over in June 1991 had to approach the World Bank and the International Monetary Fund seeking financial help to tide over the crisis. This triggered a series of economic reforms.
How was the financial sector at that time? With two decades of government ownership of major commercial banks, which controlled a market share of over 85% of the business and very impressive performance in terms of policy goals, the public sector banks (PSBs) had overwhelming legacy issues: over one fifth of their loans were stressed according to the then prevailing health code yardsticks; income recognition and provisioning systems were unrealistic; returns on equity was abysmal, their capital and reserves were hopelessly inadequate to cover business risks; operational costs were high compared to international standards; and their overall work efficiency was a matter of recurring criticism. What did the Rao government do?
Dr Manmohan Singh who was Mr Rao’s finance minister candidly admitted 25 years later (Indian Express 1 July 2016) that the government really did not know how to go about reforming the banks! An expert committee headed by M Narasimham gave a series of recommendations in November 1991. During the next five years, 1992-97, there was a paradigm shift in the financial sector. In 1998 the second Narasimham committee made further recommendations with a view to consolidating the gains already made during the early years of reform. The financial sector had a clear road map for change.
At this late hour in the day supporting data are superfluous. Suffice it to quote two eminent authorities, a respected academic and a former governor of Reserve Bank of India (RBI), to confirm the positive changes.
Prof TT Ram Mohan of IIM Ahmedabad in an authoritative analysis supported by data had said this: ‘it is not just that Indian banks have achieved a turnaround; they have gone on to become among the most profitable in the world’ (2007, Banking Reforms in India- Charting a Unique Course, Economic & Political Weekly March 31). YV Reddy, who was the RBI governor during 2003-08, commended the performance of Indian banking system in these words: ‘The performance of the financial sector, in terms of its contribution to growth and stability, is rated among the most impressive of all the sectors in India.’ (2011: Global Crisis, Recession and Uneven Recovery, Orient BlackSwan P. 373)
During a decade after the reforms began the sector was able to weather two serious challenges. The 1991-92 massive securities scam exposed the banks to a whopping Rs3543 crore as against the public sector banks’ (PSBs) aggregate capital of Rs3,113 crore.
At the turn of the millennium, three PSBs namely UCO Bank, United Bank of India and Indian Bank were really sick. A committee of Confederation of Indian Industries (CII) headed by KV Kamath had advised the government to liquidate the banks. The government, on the other hand evolved bank-specific plans to revive them successfully. (One of them, namely Indian Bank is among the top six PSBs today.)
What made all this possible? A desire to revitalise a strategic sector in the economy, an openness to seek experts’ advice and a clear long-term vision. There were criticisms from different quarters (including this writer!) but the path chosen and the strategy adopted stood largely vindicated as evidenced by the robust growth of the financial sector in India till 2012.
..and the one from 2014 and beyond:
Let us move fast forward to 2014 when the Narendra Modi government came to power. The banking sector was showing symptoms of ill-health once again. After two decades of commendable growth, called PSBs’ parameters became matters of concern. RBI in its Financial Stability Report (FSR) of December 2014, sounded the alarm bells. Between 2011 and 2014, credit growth had shrunk from over 20% to less than 10% in case of PSBs; the deposits growth rate fell from nearly 19% to less than 13%; the non-performing assets (NPAs) bulged explosively. Profitability had eroded and a few PSBs had already slipped into the red.
What did the Modi government do during the first five years of its reign? Let’s take a quick look at the measures announced by the government between 2014 and 2019.
It started off with Gyan Sangam, a conclave of bankers and ministry officials held in January 2015 followed by an announcement of its intent to bring about a series of measures under the fanciful label Indradhanush. These measures encompassed capital infusion, setting up bank boards bureau (BBB), de-stressing assets, appointment of heads of PSBs and governance reforms. This proposal was already preceded by a Committee headed by P J Nayak on governance reforms.
The government injected additional capital into PSBs, set up BBB, split the chairman & managing director’s post into two-a part time chairman and a whole-time managing director who would be the chief executive officer (CEO) and relaunched the earlier no-frills zero balance basic savings bank account (BSBA) with a new name, Prime Minister’s Jan Dhan Yojana Account giving targets to every bank to bring new accounts.
In the meantime, the volume of stressed assets went on rising. Huge frauds (like Nirav Modi, Mehul Choksi and Sterling Biotech accounts) rocked the banking industry during 2018-19.
The collapse of Infrastructure Leasing & Financial Services Ltd (IL&FS) and Dewan Housing Finance Ltd (DHFL) in 2018 hit several banks very hard. Despite claims of more rigorous preventive measures both the number of and the amounts involved in frauds ballooned.
What was the follow up on the Indradhanush package of 2015? The recommendations on governance made by the PJ Nayak Committee in 2014 and by Vinod Rai, the first chairman of BBB in 2018 when he demitted his office remained in a limbo.
The CEOs were shuffled from one bank to another and with short tenures; many boards which are required to have 15 members continued to be truncated.
In 2015, RBI governor Raghuram Rajan gave a detailed note to the Prime Minister on the seriousness of the impact of willful defaults by big borrowers. No action was taken by the government.
The government, in the meantime, demonetized high value currency notes in November 2016 removing over 86% of the currency from circulation. The consequential economic dislocation put tremendous pressure on the PSBs to exchange dud notes- with the rules changing every day, bankers were on tenterhooks. The normal business of accepting deposits and lending, monitoring loans and their recovery severely suffered for three crucial months.
Between 2016 and 2018 RBI governors were changed twice. UPA II-appointee Raghuram Rajan preferred to hang up his shoes in June 2016; NDA appointee Urjit Patel left midway in 2018 much before his term expired. So did his deputy Viral V Acharya. Shaktikanta Das, a bureaucrat, was put in the saddle.
In the meantime, fresh FSRs of RBI became shriller in their warnings about the magnitude of the risks due to rising loan defaults.
When all these were going on, the government thrust three rounds of mergers: the first in 2017 with the merger of SBI associate banks with SBI itself, the second in 2018 with the merger of Dena Bank and Vijaya Bank with Bank of Baroda and the latest in 2019 with 10 PSBs getting merged into four. There was no attempt to address the plagues afflicting the merged or anchor banks.
The process of post-merger integration derailed whatever efforts were on to make the PSBs recover their health. Pray, who suggested that the PSBs be merged? It is a panel of ministers created in August 2017, called ‘alternative mechanism’ comprising the finance minister and two or three ministers who hardly have expertise on the financial sector.
The bumbling strategy of the government continued unabated. In August 2019 it launched what was billed as ‘Multi-level Consultation and Ideation’ (MCI) for assessing the banks’ role in making India a $5 trillion economy by 2024. At the lowest level, branch heads were to meet, followed by meetings at the state level and finally at the national level for brainstorming with a view to evolving a plan to be dovetailed with a national blueprint. No sooner it was launched than the government announced the mega merger of ten banks into six, pushing the MCI into a limbo.
When the bank CEOs were busy organizing town hall meetings in September 2019 to apprise the staff and the customers with the nitty-gritty of mergers, the ministry of finance directed the PSBs to organize massive loan melas all over the country to step up advances to MSMEs: they were called ‘customer outreach programmes’.
By then the crisis was engulfing the banks. The NPAs of PSBs skyrocketed to Rs7,39,541 crore in March 2019 from Rs2,78,468 in 2015. In fact, in March 2018 it was still higher at Rs8,95,956 crore. Who were the defaulters? There is hard evidence to establish that as on December 2018, as much as Rs4,46,158 crore, implying nearly 50% of the NPAs, were due from the top 100 accounts. The already merged banks and those in the process had priorities elsewhere, not on setting the houses in order.
What is amiss and its implications:
The government now wants to sell some of the PSBs to enable it to reach its disinvestment targets. The goal is not to set the banking sector on a path of recovery and robust health. Don’t wash the baby, instead throw it out with the bath water.
A critical sector like banking cannot be treated with band aids (with apologies to Raghuram Rajan) or by invoking God’s will. A blueprint of a long-term action plan with set goals and strategies to achieve them within a time frame is how one should go about as was done in 1991-92. That approach is conspicuously missing in the current dispensation. The economy and the banking sector will pay dearly for this lack of vision and a long-range plan. The lessons of history are for guiding rational human beings!
(TR Bhat is former president of All India Bank Officers' Confederation (AIBOC) and former officer of Corporation Bank)