Modi Government’s Banking Scorecard: Of Promises Made and Broken

The Modi government has made many promises of reforms for public sector banks. How many have been fulfilled so far?

Prime Minister Narendra Modi.

(Photo Courtesy: PMO/Screenshot)

In January 2015, just months after the Narendra Modi-led administration took charge, the government invited senior public sector bankers for a brain-storming session.

Aptly titled the “Gyam Sangam”, the session was intended to seek suggestions on how to improve the functioning of government-owned lenders, which still control nearly 70 percent of the banking market. At the end of that two-day retreat in Pune, bankers came out hopeful.

Prime Minister Modi had assured them there will be no political interference in the functioning of these banks, structures like the Banks Board Bureau will be created, and reforms in areas such as human resources will be undertaken.

The mood during the retreat was positive as bankers felt that the government was finally coming to the table with practical solutions to the problems facing public sector banks, said a former bank chief who attended the meeting while speaking on condition of anonymity. The measures discussed would have had a long-term impact on resolving issues plaguing the sector, the banker added.

Four years later, the government has spent Rs 2.5 lakh crore to recapitalise these banks but few structural reforms have been concluded, leaving the open question —  are taxpayers simply throwing good money after bad?

To be sure, the biggest change for the banking sector during the Modi government’s tenure has been the institution of an insolvency regime. That has helped all banks, including government owned lenders, with their attempt to climb out of the bad loan crisis facing the sector. But beyond that, many of the promises of reforms for public sector banks have gone unfulfilled.

Interference... But of a Different Kind

A key criticism of the Congress-led administration’s handling of public sector banks was its push for lending to the infrastructure sector. Easy fiscal and monetary policy, along with the attempt to push infrastructure growth, led to a surge in corporate credit without adequate checks and balances. That lending binge led to bad loan crisis being faced by the Indian banking sector now.

But has the current administration approached banks any differently? Yes and No.

The Narendra Modi-led government has been tough on corporate borrowers. An insolvency code has been brought in and defaulting promoters have been barred for rebidding for their own projects.

Yet, the current government has not shied away from pushing its own priorities on public sector banks.

Among them is the government’s financial inclusion drive. On 15 August 2015, Prime Minister Narendra Modi announced the Jan Dhan Yojana, aimed at providing bank accounts to financially excluded customers. The pressure and cost involved in achieving this objective over a short period of time fell on public sector banks.

As on 12 December, total accounts opened under the Jan Dhan Yojana stood at 33.55 crore. Public sector banks accounted for nearly 27 crore of these, while private sector banks had opened only one crore accounts. The rest were opened by regional rural banks.

The government also brought in the MUDRA scheme to refinance small-value loans under Rs 10 lakh. For the financial year ending March 2019, the government has set a target of Rs 4 lakh crore. Once again, the heavy lifting to achieve the targets set under this scheme has been done by public sector banks.

Most recently, when the government announced the Rs 2.11 lakh crore recapitalisation plan, it said that banks will need to step up lending to SMEs.

According to a banker in the know, who spoke on condition of anonymity, the government has kept a close tab on the progress made by public sector banks on its pet schemes, be it the Jan Dhan Yojana or MUDRA. Regular updates are sought and banks are prodded to do better.

While it could be argued that the priorities adopted by the current administration may not be as damaging as unfettered lending under the previous government, it does show that interference in commercial decisions of public sector banks continues.

“Public sector banks are not just pure play commercial institutions. Whether implicitly or explicitly, they do need to carry out some social objectives outlined by the government.”

Jindal Haria, Associate Director, India Ratings & Research

Banking Reforms: Promises V/S Delivery(Photo: BloombergQuint)

Lip Service to HR Reforms

The government’s promise to bring in HR reforms, starting with the setting up of the Banks Board Bureau, has also yielded little.

The BBB, which finally started its function in April 2016, has seen limited success, partly because of the lack of a wider mandate from the government. The BBB has drawn up lists of eligible candidates for leadership positions at public sector banks, but its final recommendations have been often ignored.

In March 2018, the BBB released a compendium of all recommendations made by the bureau to the government in two years of its existence. It noted that it had rarely received constructive feedback on its recommendations and that it was merely functioning as an appointments board.

In this compendium, the then BBB Chairman Vindo Rai noted that there was a lack of an “organic relationship” between the government and the bureau.

Beyond the setting up of the BBB, little has changed in the ability of public sector banks to attract and retain good talent.

In March 2017, the Finance Ministry allowed public sector banks to give out employee stock options (ESOPs), to incentivise performance. Some public sector banks like Allahabad Bank, United Bank of India, Canara Bank and Punjab National Bank have announced ESOP schemes. The schemes, not surprisingly, have seen little interest given the poor performance of these banks.

The Weak Get the Most Support

The government also abandoned its attempt to reward performance mid-way.

In August 2015, when the government introduced the Indradhanush scheme to recapitalise banks using Rs 70,000 crore in capital, it set up strict business milestones to be achieved before banks qualify for more capital allocation. Memorandum of Understandings (MoUs) were to be signed between individual banks and the government to achieve certain goals.

However, as bad loans soared and capital levels at smaller and weaker public sector banks started to fall below minimum regulatory requirements, the government was forced to abandon this approach.

Instead, much of the recapitalisation money has gone to the weakest banks as regulatory capital. The hope to push growth capital into banks that can use it best seems to have been pushed back to another time.

As elections draw closer, the government is now in a battle with the Reserve Bank of India to ease the Prompt Corrective Action norms that it once supported. The objective, most assume, is to increase lending, particularly to small and medium enterprises.

Throwing Good Money After Bad?

In the absence of any structural reforms, will the Rs 2.5 lakh crore that the government has spent on recapitalising public sector banks bring any tangible benefits?

Most of the public sector banks, barring a few large ones like State Bank of India and Bank of Baroda, are continuing to lag behind their private sector peers. This reflects in credit growth data. Private banks have seen incremental credit growth by 20 percent year-on-year compared to 9 percent growth shown by public sector banks, highlighted a November report by Kotak Institutional Equities.

This may continue for some time.

The government has taken a lot of measures but they have not yielded the desired results, added Dhananjay Sinha, head of research at Emkay Global. “Even after the recapitalisation of nearly Rs 2.5 lakh crore, the banks remain weak and won’t return to substantial growth in the next one to two years,” he added.

According to Haria from India Ratings, the recent recapitalisation should be seen as a way to wash-off past sins but doesn’t guarantee a better future.

“The question is whether after this infusion the public sector banks would have changed or updated their credit assessment and operational processes, approval matrices, and system of checks and balances that would be able to identify frauds perpetuated in the past at the minimum,” he asks. “From conversations with banks things are moving very slowly in the right direction. But is the speed adequate? That remains to be seen,” he said.

(This story was originally published on BloombergQuint.)