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Overdraft Saving the Indian Saver – Urjit Patel

by Venky

Overdraft: Saving the Indian Saver eBook by Urjit Patel ...

The 24th Governor of the Reserve Bank of India, Urjit Patel in his latest work “Overdraft” mounts a scathing albeit nuanced indictment on the malaise and miasma plaguing the Indian banking sector. Taking utmost care to ensure that his views do not transmogrify into an all-out polemic, he is measured in his criticism and optimistic in his outlook. As Mr. Patel clinically expostulates in his compelling book, a pugnacious desire to further populism, a byzantine set of self-defeating regulations and a regulator who is reduced to a mere bystander if not a toothless tiger, all contrive to produce a parlous ecosystem, that is ever engaged in temporary ‘repairs’ with hardly any time for ushering in meaningful reforms.

“I HAVE BEEN IN the news; while it lasted, the contretemps made good theatre. It ended when I stepped down. The theatre of eminences has been going on for centuries and will continue for many more; eventually, everyone is forgotten.” Any book which begins as loquaciously as this invariably does not disappoint and “Overdraft” certainly doesn’t. Dwelling about the banking crisis in the country, Mr. Patel attributes this condition to the phenomenon of creeping banking sector-fiscalization, which in layman terms refers to “ownership of banks as a means for day-to-day macroeconomic management rather than primarily for efficient intermediation between savers and borrowers.”

At the root of the crisis, lies the issue of ownership. As Mr. Patel holds forth, despite three decades of banking sector reforms and an encouragement accorded to the entry of private banks, state-sponsored credit creation retains a majority share. The looming presence of government institutions in all segments, according to Mr. Patel has resulted in a mushrooming of ‘Stackelberg leaders’, an allusion to a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially.

The mandate and priorities of the financial institutions in India seem to be haphazard and misaligned. These institutions have been tasked with priming “vague (and extraneous) objectives – underwriting the government’s disinvestment targets, preserving employment in public enterprises, contributing assistance to states based on the political clout of the representatives, intermittently providing artificial support to stock markets, and occasionally overt lapses in due diligence.” Mr. Patel identifies 9 “Rs” against which he undertakes an impartial evaluation of the performance of the Indian banks, both in the public sector as well as the private banks.


For the canard spewing reprobates who strive to lay the blame of a broken-down banking system, squarely, on the doorstep of the Narendra Modi Government, Mr. Patel in no uncertain terms, traces the genesis behind the horror story. …”the dominant antecedent is excessive lending and borrowing; it is not surprising that in the decade since 2009/10, the bank credit–GDP ratio peaked in 2013/14.1 (If we include corporate bonds outstanding, credit from non-banking financial companies [NBFCs], housing finance companies [HFCs] and cooperative banks, the augmented financial resources/GDP ratio for 2018/19 is around an estimated 85 per cent.) Secondly, the asymmetry of information between the regulator and lenders, which is why the supervisor is almost always too late, is inevitably a critical ingredient. Thirdly, policymakers and regulators convince themselves, when the credit cycle is motoring along, that ‘this time it is different’ so there is no need to judiciously apply brakes – take away the ‘punch bowl’ or, at the least, dilute it. The present mountain of bad debt in India is no exception. The lending cycle/asset build-up started in the mid-2000s and even through the global financial crisis, we kept lending channels wide open – at a growth rate of about 17 per cent (in non-food credit) as late as 2011/12 – based on ambitious projections of debt-servicing capacity underpinned by an assumption of 8–8.5 per cent annual growth over a long period. Project execution would, in turn, have assumed minimal glitches or hold-ups. There was a (systemic) failure to maintain balanced credit expansion; non-food credit growth annually over 2006/07–2011/12 was 20 per cent versus the real GDP growth rate of around 7 per cent per annum.”

Mr. Patel also identifies gaping and inexcusable holes in the Corporate Governance of the Public Banks which leads to a rot in the system that is both systemic as well as endemic. With a dearth of senior management in place, governance according to Mr. Patel transcends the plight of a neglected child. “Ditto for the GBs’ board of directors; it is common knowledge that this has traditionally been a placeholder for sinecure to political supporters. Key committees of the board, like the audit committee, have suffered from both inadequate membership, as seats go unfilled, as well as paucity of talent/domain knowledge to carry out fiduciary responsibilities to the level that is required and expected.”

An insidious arrangement of quid pro quo also contributes to ensure a virtual stagnation of reforms in so far as the banking sector is concerned. Consider this damning fact, “In July 2019, the regulator imposed fines on eleven banks for a wrongdoing. A few months later, in September 2019, one government bank in that list received an award from a financial publication. In October 2019, a private bank that had been punished in July won an award from another financial publication. One can go on, as there are other such instances.” As many as 90 per cent of frauds (by value) occurred in the government banks as against 8 per cent in the private banks.

Since the advent of the NDA, a plethora of reforms have been initiated to stem the rot. The Asset Quality Review (AQR) exercise was initiated in the second half of 2015. “The clean-up started with a candid assessment of the sloth hiding in the sector’s balance sheet. Asset Quality Review. Around one-sixth of GBs’ gross advances were found, at first pass, to be stressed (non-performing, restructured or written-off), and a greater part of these were bad debts. For some banks, the share of assets under stress approached or exceeded 20 per cent. The estimate of stressed assets had doubled from 2013 in terms of what had been recognized by banks and acknowledged by the RBI. The Strategic Debt Restructuring (SDR) Mechanism was introduced in February 2014 (and revised in June 2015). The 5:25 scheme was introduced in July 2014 and its scope was extended in December 2014. The Scheme for Sustainable Structuring of Stressed Assets (S4A) was notified in June 2016. In May 2016, the Insolvency and Bankruptcy Code (IBC) was enacted as a watershed towards strengthening India’s financial architecture”

As Mr. Patel illustrates, reforms more than punitive measures are the need of the hour. Imposing penalties on errant banks in general and Public Sector Banks in general, result in a perverse play of “neutrality.” Large fines and strictures on banks have been imposed for underreporting NPAs, accounting fudges and regulatory violations, more generally. As mentioned earlier, banks in December 2019 have had to reveal bookkeeping discrepancies and restate balance-sheet figures. This casts doubt on the effectiveness of penalties imposed by the regulator. Frankly, the flow of funds in the case of GBs suggests that monetary penalties are a case of money going from the ‘left pocket’ to the ‘right pocket’ (money collected by the RBI is passed on to the government as surplus), and back to the ‘left pocket’ (government returns the money to GBs for recapitalization).”

Further, the Reserve Bank of India, although the primary regulator is rendered infuriatingly impotent as the powers to remove Directors and appoint a new management etc. in the case of Government Banks is totally taken out of the ambit of the RBI. This has the effect of transforming the premier regulator of the banking industry into a spectator lamenting over unfortunate occurrences.

However, all is not lost. A firm resolve, a firmer mindset and a paradigm shift in resoluteness can still bring the Indian banking sector back in the reckoning. For that to happen, the need of the hour is people with the caliber of Mr. Urjit Patel.

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