Resolving banking crisis

Advancement is not possible without addressing the problem of non-performing assets in economic growth.

 
The government that takes over the office after an election will have to ace a serious and unresolved problem that is India's banking sector. To do that, they need to analyze how the issue arises in the first place. Only then it can eliminate ideologically-driven and straightforward solutions in favor of those that can be effective.
Non-performing assets (NPAs) at commercial banks aggregated to rupees10.3 trillion of advances, in March 2018. Public sector banks (PSBs) aggregated for rupees 8.9 trillion, of the total non-performing assets. The ratio of the gross non-performing assets to advances in PSBs was 14.6%. These are the levels that mostly correlate with the banking crisis. In 2007 & 2008, NPAs totaled Rs.566 billion of prepaid advances. The increase in non-performing assets since then has been astonishing. How did this start to happen?
 

The Root of the Crisis

The answer somewhat lies in the rapid expansion of lending by the financial institution of the years 2004-05 to 2008-09. In that period, non-food credit (such as Agriculture, Industry, and Service) increased. During that phase, the world economy, as well as the Indian economy, was thriving. To take advantage of the growth opportunities they saw, coming Indian firms borrowed hurriedly. Most of the investments were made into infrastructure and related areas — telecom, power, roads, aviation, steel. Businesspeople were overwhelmed with excitement, partly rational and partly irrational. They believed including others that India had entered an era of 9% growth.
 
Thenceforth, as the Economic Survey of 2016-17 notes, many things began to go unsound. Thanks to problems in obtaining land and getting environmental clearances (seeking permission from the government for the installation and modification of specific projects), several projects got to halt. Their costs got increased. At the same time, revenues fell well short of forecasts with the beginning of the global financial crisis in 2007-08 and the slowdown in growth after 2011-12. Financing costs rose as policy rates were stiffened in India during that phase. The decrease in value of the rupee meant that companies have to face higher outflows which were being borrowed in foreign currency.
 

Tightening Norms

The year 2014-15 marked a turning point. The RBI, believe that non-performing assets were being underrated, so they introduced more robust norms for non-performing assets recognition under an Asset Quality Review. As a result, the Non- performing assets in 2015-16 got doubled over the previous result. Higher non-performing assets mean higher provisions on the part of banks. It rose to a level where banks, especially Public sector units, started making losses.  As a result, their capital got deteriorates. The capital which they received from the government was slow in coming, and it was hardly sufficient to meet regulatory norms for minimum capital. Without decent capital, the bank credit can't grow. Besides that, the numerator in the ratio of Gross non-performing assets and advances rose sharply, growth in the denominator fell. These movements caused the ratio to increase the crisis stage. Once non-performing assets happen, it is important to effect to resolve them quickly. Otherwise, the interest on dues causes non-performing assets to rise relentlessly.
Many have argued that the problem is more concentrated in PSBs as the public ownership banks are corrupted and incompetent. Therefore, the solution was to privatize the PSBs, at least the ones who are weak.
 
There are problems with this framework. There are massive changes within each ownership category. In 2018, the State Bank of India's gross non-performing assets ratio was 10.9% for ICICI Bank; it was 9.9%. 
As mentioned earlier infrastructure projects affected by the global financial crisis and environmental and land acquisition issue. Also, mining and telecom affected by an unfavorable court decision.  Dumping from China impacted the steel severely. Hence, the sectors to which PSBs were exposed, i.e. (mining, iron and steel, textiles, infrastructure, and aviation) were affected by factors beyond the control of bank management. 
 

Plans to Prevent such Crisis

Privatizing of PSBs is not the solution to critical problems. We need to set off some ideas and actions, aimed at avoiding the repetition of such turmoil.
The actions which banks can take immediately to resolve non-performing assets is to accept losses on loans. The Association of Indian Banks' has set up a six-member panel to oversee resolution plans of lead lenders.  Another alternative is to set up a Loan Resolution Authority if required through an Act of Parliament. Secondly, the government must infuse whatever additional capital is needed to recapitalize banks and providing such capital in multiple installments is not helpful.
 
 
The RBI needs to develop a better system for controlling macro-prudential indicators(The ability to monitor financial soundness ). It needs to look out for credit bubbles(When consumers build up so much consumer credit that they are unable to repay). 
 
Actions need to be taken to strengthen the functioning of banks, some actions need to be taken specifically in PSBs. The functioning of PSB boards can be improved. One of the most important lessons which were learned by the past experience with non-performing assets is that of concentration risk (the level of risk in a bank's portfolio arising from concentration to a single counterparty, sector or country.  From 1 April 2019. The limit for exposure to any business community has been reduced from 40% of total capital to 25% of Tier I capital.