The role of India's central bank and regulatory body, the Reserve Bank of India (RBI), has expanded over the past year, with Indian banks under unprecedented scrutiny.
The Indian banking sector has been trying to set aside fears of soaring bad loans, failed institutions, and internal governance lapses.
When the Covid-19 crisis began a year ago, India faced a triple whammy. The country was grappling with a prolonged economic slowdown before the pandemic, its financial system was already fragile, and subsequent lockdowns triggered a recession
The RBI reacted quickly: between February and April 2020, it pumped in Rs5.24tn ($70bn) into the Indian economy. It also slashed repurchase rates by 115 basis points (bps) to a historical low of 4%.
The banks heeded the RBI's calls for cheaper loans. The lending rates for new loans at commercial banks has fallen by an average of 112bps.
However, despite the big reduction in the lending rates, bank credit in the country grew by 5.7% in the year to end-January 2021 – a significant 275bps dip in comparison to the credit growth witnessed during the same period a year earlier. More worryingly, industrial loans have contracted by 1.3% in the year to end-January 2021.
Part of this dip in credit growth can be attributed to the fact that borrowers have been playing it safe amid the pandemic.
However, many Indian companies feel that banks have also been reluctant lenders. Underlying this reluctance is the fact that prior to the pandemic, bad loans at Indian banks stood at 8.2% (Rs8.96tn) of the sector’s total Rs109.19tn loan book.
Of the Rs8.96tn in pre-pandemic bad loans, 76% were with the public banks. Many state-owned banks have been reckless lenders under government pressure to drive growth, coupled with politically-motivated lending decisions.
Of the remaining pre-pandemic bad loans 23% (Rs2tn) was with 22 private lenders including Lakshmi Vilas Bank, which was bought by Singapore’s DBS as part of a bailout in November last year.
A level playing field
Former RBI deputy governor Viral Acharya has argued that one of the RBI’s reform priorities should be to put private banks and public banks on a level playing field.
Private banks are regulated by the RBI alone, while public banks report to both to RBI as well as India’s Ministry of Finance.
This dual system of reporting for public lenders has created a dual set of regulations, influencing the appointment of key personnel and creating different operational parameters.
In the past few years, most high-profile bad loans by private lenders have been because of the idiosyncratic behaviour of top bankers. It led to the forced departures of Chanda Kochchar from ICICI Bank, Shikha Sharma from Axis Bank, and Rana Kapoor from Yes Bank.
The RBI has sought to address this. Following the collapse of Yes Bank, the RBI issued new regulations to improve the appointment process of chief executives at private banks. However, governance oversights have continued.
Almost a quarter of the ownership of the private banking sector in India is controlled by unknown foreign investors
The RBI also plans to scrutinise Indian banks’ global depository receipt holdings, which was one of the suggestions put forward by the RBI’s internal working group in November. The move seeks to rein in undue influence by dominant shareholders at private lenders.
However, the RBI would need the support of the markets regulator – the Securities Exchange Board of India (SEBI) – to effectively streamline the ownership of private banks.
Amid fears of Chinese takeovers, almost a quarter of the ownership of the private banking sector in India is controlled by unknown foreign investors. At present, the SEBI only mandates banks to name entities which hold stakes of more than 1%.
The RBI has also floated the idea of allowing Indian corporates – the biggest borrowers as well as chief defaulters – into India’s banking sector.
While RBI governor Shaktikanta Das has distanced himself from the proposal it could provide corporates with a backdoor entry through shadow banking licenses. Critics fear the move could further weaken governance standards.
The RBI has taken small steps in its efforts to overhaul India’s troubled banking sector, but it still has a lot to do and the road ahead for its reform effort promises to be rocky.
Furquan Moharkan is a business journalist and author of 'The Banker Who Crushed His Diamonds: The Yes Bank Story’.
