By Raunak Haldipur
The banking sector is a major global growth driver. The financial crisis in 2008, which followed the bankruptcy of four major US banks, sent shockwaves across the global economy. Fortunately, India wasn’t as badly affected, thanks to the Reserve Bank of India’s (RBI) decision to implement preventive measures, by directing banks to refrain from investing in products like collateralised debt obligation (CDOs), which several foreign investment banks were creating and selling.
How’s India’s banking sector doing?
Over the past few years, the Indian banking system has been hit with several massive cases of bank fraud, be it the case of Kingfisher and Mallya, Nirav Modi and PNB or the more recently unmasked Deepak Kochhar and ICICI Bank case. The more recent subsequent cases of financial fraud has raised questions about whether Indian banks are truly capable of performing better than foreign banks?
The recent frauds highlight the deep-seated issues of the banking system, which are likely the the most pressing problems affecting our economy. The rising percentage of non-performing assets (NPAs), where borrowers default on repaying loans to banks, has reached alarming levels. In November 2016, the government revealed that the total NPAs of 49 Indian public and private sector banks were as high as Rs 1.5 lakh crores. In terms of NPAs as a percentage of the overall loans made by Indian banks, the figure stands at 20.2% for some banks, such as the Indian Overseas Banks, Scroll reported.
When borrowers default on paying their debts, banks are free to move the debt recovery tribunals, in efforts recover dues from the defaulter. Unfortunately, the state of these tribunals is abysmal. The total volume of bad debt being litigated before the tribunals has skyrocketed from Rs 1,46,180 crores in 2011, to Rs 3,74,983 crores in 2015. Both legal and administrative issues plague these debt recovery tribunals, which is directly related to their poor performance. This is also one of the main reasons why we need a complete overhaul of the banking system.
Reforms that the banking system needs to adopt
I think we all can agree that a stronger banking system will only benefit the country. A structural change in the banking system is likely on the cards with BankChain scheduled to be implemented soon. The government is also mulling the possibility of privatising public banks. The Federation of Indian Chambers of Commerce & Industry (FICCI) has been pushing towards privatisation of all Public Sector Banks (PSBs) except SBI. The FICCI’s recommendation came after the discovery of the Rs 11,400 crore PNB fraud involving Nirav Modi.
“Given the continuous pressure on the government finances on account of weak performance of the banks, the government should consider privatisation of PSBs. This would reduce the drain on the exchequer and the money saved could be used for developmental schemes and programmes of the government,” FICCI President Rashesh Shah said, Business Line reported.
However, there is a downside to privatisation. Historically, PSBs have generally provided loans to lower income groups, and in some cases where the borrower was unable to repay the loans, the government could step in and waive them off.
However, once public banks are privatised, priority sector lending will likely become more stringent, and the ones in dire need, may not get loans. On the other hand, private sector banks are usually under great pressure to deliver results, which may lead to the number of NPAs likely dropping, in the event that the government gives its stamp of approval for the privatisation of PSBs.
However, privatisation and recapitalisation of PSBs alone are not sustained long-term or permanent solutions. The implementation of such strategies will remain ineffective unless inherent issues with the banking system, related to governance, operations, productivity, risk management, talent acquisition, and customer service are resolved.
What is blockchain and how can it be used in banking?
Blockchain is the backbone technology behind the creation of cryptocurrencies such as Bitcoin. Blockchain has been garnering a lot of interest from various tech companies, startups and media companies, especially since cryptocurrencies like Bitcoin exploded onto the market. One of the reasons why there is so much interest in blockchain is because the technology, apart from following its own unique relaxed regulatory form, also has the potential to make a lot of processes in various industries transparent, secure, and more efficient.
In November 2017, the State Bank of India (SBI) announced that it will roll out beta launches of blockchain-enabled smart contracts, and will soon be executing their Know Your Customer (KYC) processes through blockchain. These processes are part of “BankChain,” which is the result of the collaboration of 27 banks to explore and build blockchain solutions for banking.
Internationally, banks are seriously looking at blockchain as a means to come up with easy and secure solutions for processes such as peer-to-peer payments, loans syndication, KYC, cross-border payments, and virtual currencies, among other things. Some are of the opinion that blockchain may soon be widely adopted by the banking industry, and may also help prevent bank frauds by making banking more secure.
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