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PARSHAD DESAI

THE BAD BANK

AFTER A FEW TURBULENT YEARS, THE INDIAN BANKING SECTOR IS GOING THROUGH A LOT OF CHANGES. HERE'S A SIMPLIFIED TAKE.

As financial scams became a common place in the Indian news cycle, the intensity of shockwaves has receded spectacularly. From Harshad Mehta to Vijay Mallaya, the scamsters have become more and more ingenious. What has still remained the same is the destructive effect of these scams on banks.


THE OMNIOUS WORD: NPA

Mention this word to a banker friend of yours & see how white he turns! NPA or Non Performing Assets simply refer to loans or advances disbursed by banks on which interest or principal amount has not been received since 90 days. NPAs cripple the cash flow of banks and have an adverse effect on their lending capacity. The problem in Indian banking is that NPAs have shot up to a great extent since FY 2015-16. The graph below (sourced from Forbes India) aptly illustrates their catastrophic rise.

You can see only imagine how the pandemic would have inflated these numbers further as the lockdown forced millions temporarily out of business. Hence, immediate action was needed to rectify this mess.


COMETH THE SAVIOUR

The recent budget has thrown the spotlight on the banking sector & paved the way for some major changes which can transform the sector for good. Here are the reforms in a nutshell:


  • Create a bad bank which would be take on the majority of NPAs from various banks around the country. The rationale behind this move is it would cut some slack off the balance sheet & an entity which specializes in dealing with NPAs would extract the money more efficiently,

  • Another move would be disinvestment in Public Sector Banks. The government is planning to sell off stakes in mid & small cap banks in order to finance the fiscal deficit to the tune of Rs. 20,000 Crores. Historically, the government has dominated the banking scene for decades but the wheels of change are finally rotating. Some prominent PSBs are shown below.

  • In a positive move for the Insurance Industry, the FDI limit has been increased from 49% to 74%. This would attract foreign capital & make the industry more lean.

  • Strengthening the position of depositors, the budget also introduced a Deposit Linked Insurance Scheme which would protect them in case a bank is liquidated (Remember Yes Bank & UCO Bank!?) by allowing deposit upti Rs. 50 L akhs.

  • The big guy in town, LIC is also going public. Having a mammoth share of 70% in India's insurance market, this would serve as a major cash cow for the Indian governement.


THE NOT SO SWEET PLANS
  • The Indian Governement is notorious for its abysmal performance in disinvestment. The targets have never been achieved & experts believe the assets are always undervalued. It remains to be seen how successful the government is ints its current bank selling spree. The graph below highlights the seething gap between execution & expectations.

  • Nations around the world are gearing up for a blockchain revolution. Countries like China & Sweden are using a CBDC (Central Bank Digital Currency) to digitize money supply & have a very accurate real time data of economic activity in various sectors, barring privacy concerns. India though has taken no such forward looking initiative which might cause a setback in the long term.

  • India's fintech scene is catching fire. Fintech is producing many unicorns (even the first of 2021,Digit). In such a scenario, the government could have launched some initiatives providing a boost to the same like ease in setting up, tax holidays or fintech focused seed fund.


THANKS FOR READING. I HOPE THE ARTICLE GAVE YOU A BALANCED PERSPECTIVE ABOUT INDIA'S BANKING REFORMS. SUBSCRIBE TO THE EMAIL FORM BELOW TO STAY AHEAD OF THE CURVE.

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