Prof. M. K. Bhat
A sound financial setup, innovative and adaptive to the changing requirements of business, is a prerequisite for the economic growth of India. No economy can dream of attaining new heights with a weak financial setup despite whatever new strategy it may apply. A robust growth will be possible, if the banking sector is able to adequately mobilize resources to meet the needs of the economy. It is no secret that a sizeable portion of the economic assets are still lying idle with people for either lack of banks or due to the ill policies adopted by them (Banks over the years have concentrated more in the urban areas than in the rural India). The problem gets further complicated due to the increasing non performing assets (NPA) with banks. Such assets deteriorate the health of the banking sector and are of little use for the economy. The various economic reforms under consideration for better business at present will fetch a little, if the financial institutions fail to come up to the expectations of entrepreneur class or general public. The financial inclusion or direct benefit transfer will be a distant dream with an obsolete banking system. The banks have to be commercially viable and their ill health cannot be justified at any cost.
The banking sector at present is under stress. It is facing difficulties in its expansion due to the slow economic growth. The implementation of financial inclusion & direct benefits transfers is turning a big challenge for this sector. Banks are feeling a need for improving the quality of human resources for working efficiently under the latest technological developments. The growing nonperforming assets are an indication of their low asset quality and restructuring of advances. The competition within and the aggressiveness of certain banks is making difficult for them to augment profitability. This competition is likely to intensify in the years to come.
Any financial setup turns wreck, when it fails to use its assets in a proper manner. The ill use of financial assets is due to mismanagement of the assets, poor management or the political messing of the things. It is no doubt that Government has taken a wide range of financial reforms since 1990 to meet the growing requirements of the market. These reforms have lead to a big change in the banking sector, still the competitive spirit of Indian banking seems missing. According to Standard and Poor’s rating services report titled ‘India banking outlook 2014’ The growth , profitability and asset quality is likely to remain subdued for the next 12 months despite an increase in economic growth. The changing business environment demands a new thinking regarding liquidity management, widened the scope of bank management, service deliverance and changed the risk parameters.
In pre liberalized era more than 90% of Indian banking was dealt by the public sector banks and the protective economy implied little pressure on banks regarding liquidity management. With administered interest rate, the discretion of management was limited and the risk factors in this context were not quantifiable. These banks put forward a bad record in the form of low customer services, negligible branch networking, need for computerization, waving of loans, unionization motivated by political angles and low performance of the bank workers. Bank branches were opened for popular support without taking their profitability into consideration. These banks worked as secretariats rather than as commercial institutions. These lacunas lead to the formation of Narasimham committee on financial reforms. Its recommendations lead to the growth of private sector banks .These private sector banks tried to overcome the inconveniences faced by public sector banks, but they were also caught by irritants of different nature.
The current business scenario has opened new avenues and challenges for Indian banks. They can hardly remain mute spectators in the present competitive environment and the competition in this sector has increased manifold from both domestic and foreign financial institutions. The competition generated by economic reforms has reduced their profitability. The banking sector is undergoing transformation and the driving forces of this transformation at present are technology, consolidation, and convergence .The structural transformation can help them to compete with foreign big financial institutions. Banks may have to grow out of their narrow focus on banking services to become financial service providers for both retail and corporate customers. The pressures in this sector have grown from both banking and non banking institutions because the product boundaries have blurred the number of players in this sector swelled and the active participation of share holders has increased. These things are compelling banks to be competitive to increase profitability.
Although there are many problems in the smooth working of Indian banking sector, yet the increasing Non – performing assets can be termed as the biggest hindrance. No banking system can work properly if it bears more non – performing assets. There is a need to curtail them to improve the financial health of the economy. Indian Banking system recognizes financial distress, has to come out with steps to resolve it and ensure fair recovery of lenders and investors. It becomes imperative to find out whether the reason behind the accumulation of nonperforming assets is economic slowdown or faulty credit management or lack of professionalism in the workforce.
The accumulation of nonperforming assets in a developing economy like India will lead to the defeat of its growth aspirations, during 2012-13 the deteriorating asset quality of the banking sector emerged as a major concern with gross NPA of banks witnessing a sharp increase. The gross non – performing assets as on Sept. 30, 2013 stood at Rs 2,29,007 crore 27 percent higher as compared to Rs179891 crore as of march 31, 2013 for 40 listed banks. The non- performing assets of all banks increased to 1.68 percent of the total loan at the end of 2012-13 compared to this, the non performing assets of private sector banks rose marginally to 0.45 percent compared to 0.42 percent.
The gross NPA to gross advances ratio shot up to 3.6% in 2012-13 from 3.1% during the corresponding period of the previous year. State bank Of India had an NPA ratio of 5% at the end of March 2013. It is worth to mention here that Non -performing assets are more in public sector banks than in the private sector. Private sector banks have not shown much deterioration in asset quality and have managed their NPA at a lower level. It is no doubt that low economic growth rate and inflation have lead to an increase in the non performing assets of banks but the lack of professionalism too cannot be ruled out.
It will be prudent to curtail nonperforming assets for good banking and also for increasing the pace of economy. Norms on NPA need to be drafted to improve asset quality, recovery and liquidity. There is a need to develop competition, innovation and productivity in the banking sector. The competition will lead to economies of scale, higher technology usage and designing of more e-products. Financial sector needs strengthening to make banking more inclusive, improve geographical coverage, reduce regional imbalances and to provide credit to the unorganized sector.
(The author is Deputy Director (MAIMS) Guru Gobind Singh Indraprastha University Delhi)
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