The country is definitely going through challenging times on the economic front. While issues in the real sector such as growth, consumption, and investment cannot be solved in the immediate run of even a year, the problem on the monetary side needs to be addressed with urgency.
This is so because there is an impasse presently where the apparent stable status quo does have some pressure points that need to be de-stressed. The issues in the financial sector are quite clear and can be addressed appropriately.
These pertain to banks and NBFCs. The banking system is still grappling with the twin issues of capital and quality of assets which though being addressed is still work in progress. This is where the government should step in and make the stance clear so that the system is better equipped. The issue of NPAs has been in suspension ever since the Supreme Court quashed Feb 12, 2018, circular of the RBI.
There needs to be a clear roadmap for both companies and banks when NPAs arise or else they would just pile up as banks may prefer not to do anything on their volition if they can postpone the problem. Second, the PCA banks need to be brought out of this net. A PCA bank (prompt corrective action) is one which is fundamentally weak as profits have fallen, net worth eroded, capital depleting as NPAs rise.
While PCA banks come under the ambit of the RBI, the role of the government, by virtue of being the owner of the PSBs should be to recapitalise them if needed or take control of the management if the latter is responsible for the performance. Here, the Budget for the year may have to make some provisions for financing the same.
Third, at the ideological level, the government has to take a call on the issue of privatisation of PSBs. Presently, the route chosen is the softer version of the merger of PSBs where balance sheets are merged but the character of the bank remains unchanged.
This is a tough call. While the government has definitely wanted the PSBs to run with a private flavour, there is apprehension on two fronts. The first is the very concept of privatising PSBs may not go down well with the public as it may seem to be selling out to the capitalist.
Besides, the unions may oppose the same and seek judicial redress. The LIC takeover of IDBI had its set of opposition even though the former is a government-run company. The second is more practical. The PSBs have been the vehicle used for carrying out a number of government schemes – irrespective of the party in power. The Jan Dhan scheme was implemented virtually entirely by the PSBs.
The MUDRA loans have been the domain of the PSBs and the dictates passed to apply to them and not the private banks which are only bound by the RBI rules on priority sector lending. Therefore, there is a practical reason for not letting go of these banks. But a decision has to be taken in the next term as it will also reflect on the push that has to be given otherwise.
The other area which deserves attention in the financial space is NBFCs. The shadow banking system has grown to occupy an important position in the financial system and has been afflicted with issues of liquidity. Unlike banks which have high NPAs, these institutions have robust assets with low NPA ratios.
However, since June 2018 they have found it difficult to raise funds and while the RBI has enabled banks to lend more to this segment, it has not been adequate. There is definitely a need to revisit this system and ensure that there are channels of funding. It cannot be ignored as they are not directly under the RBI from the regulatory standpoint even though there are certain guidelines that are provided to them.
A change of stance of converting them to a different category of banks like say the payments banks or small banks can be an option that has to be debated. Standby finance is another option that can be considered so that there are avenues for raising funds.
Presently, it is the deposit-taking NBFCs that have more regulation compared with the non-deposit taking ones which are, however, systemically important institutions. Therefore, it is important for the government to address issues on the financial side so that once the economy is up and about and is in search for funding the response can be positive.
Presently, due to low investment in the economy, the demand for funds is subdued, and hence, has not created a mismatch between demand and supply for funds. Once the demand increases as growth picks up, the system should be in a position to react positively and this is where the reforms should be in place.
The last five years have witnessed a very strong policy framework being built in various spheres. However, in the last couple of years, there has been a distinct slowdown in the economy which had led to stagnation.
This cannot be reversed in the short run and while the policies will keep pecking away in the right direction, private sector investment has to pick-up. This can take a couple of years to happen but as it does take place the financial sector must be equipped to provide the requisite finance. Therefore, the immediate task should be on making the financial sector more robust and efficient.