- The Modi government wants to push the credit to GDP ratio of the country, which stands at an abysmally low rate of around 50 per cent compared to 160 per cent of and above 100 per cent for most of the developed and emerging economies.
- The Economic Survey last year pointed out that banking and financial (BFSI) is pulling back the growth of the country given the fact that India has only one bank- SBI- in the global top 100 while there should be at least six.
- The encouragement of the private sector by the Modi government would bring back the ancient golden days of Indian banking when India had the most sophisticated banking system.
The Union government is all set to announce a sovereign guarantee for ‘bad bank’ — National Asset Reconstruction Company Ltd – whose proposal was announced during the budget speech. Finance Minister Nirmala Sitharaman has previously said that “An asset reconstruction company and asset management company would be set up to consolidate and take over the existing stressed debt.” After years of reluctance, the Modi government has finally accepted the idea of a bad bank to deal with NPAs during the last budget speech. The government has acknowledged that the problem of NPAs cannot be solved only through the Insolvency and Bankruptcy Code – which stands suspended for a few years – and there is a need for a bad bank that will take all the stressed assets of the public sector banks and help them with ‘fresh start’.
The Modi government wants to push the credit to GDP ratio of the country, which stands at an abysmally low rate of around 50 per cent compared to 160 per cent of and above 100 per cent for most of the developed and emerging economies. Therefore, a fresh start for the banks, where they do not have the baggage of bad loans (or phone call loans) of the UPA era, a bad bank was needed.
The deposit to GDP ratio in the country is also high as compared to the global average of 49.5 per cent and the Chinese average of 44.95 per cent. So, India has better deposit rates but the credit growth is still lower due to high lending rates. The previous governors of RBI (Raghuram Rajan and Urjit Patel) kept the lending rates very high even by conservative estimates.
The high loan rates hurt the economy as the lending rates grew at a very low pace and thus the economic activities slowed down. RBI is considered among the most conservative central banks and, the cost of capital in India is very high as compared to other emerging markets around the globe.
The Economic Survey last year pointed out that banking and financial (BFSI) is pulling back the growth of the country given the fact that India has only one bank- SBI- in the global top 100 while there should be at least six. The Economic Survey last year also took stock on the nationalisation of the banks and other financial institutions, which are among the reasons behind the underdevelopment of the country’s financial infrastructure.
The government has decided to privatise two PSBs and announced the IPO of LIC, among the first steps to infuse energy and expertise of the private sector in the banking and financial sector which has a very strong presence of PSUs. Since the banking sector is dominated by PSUs, the government was forced to float a bad bank to recover whatever it can from the NPAs and clean up the sector to ensure that a cycle of fresh lending starts. Once the sector is cleaned up this time, in the future India would not need a bad bank because the government is privatising the sector very fast and the private players would rather adopt the IBC route.
The Indian government, for quite a long time, was shy of encouraging private banking and this led to lethargy and inefficiency in the country’s banking sector. The public sector banks of the country are a blot on the economy and a burden on taxpayers. The encouragement of the private sector by the Modi government would bring back the ancient golden days of Indian banking when India had the most sophisticated banking system.
