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Banking Sector

By: Harveer Singhtwitter.com/iastoss+91-880-2009-420

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The Challenges

• NPAs and Sarfaesi act• Capital Requirements and

Efficiency Criteria• Governance and

Professionalization of Banks

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Financial Stability Report 2015 (FSR)

• The risks to growth arising from the weakness in the financial sector despite favourable macroeconomic factors.

• The stress test under the severe scenario shows that 10 banks will have CRAR less than 7%.

• This is a wake-up call for all concerned—industry, government, investors and the financial system.

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• India is in the midst of the third episode of bank distress in the past 25 years.

• The first was after the surge in directed lending as well as political stunts such as the infamous loan melas eroded the net worth of lenders.

• The second was when the splendid post-1991 private sector investment ended with the Asian economic crisis of 1997. High domestic interest rates also left many projects unviable. Indian banks once again saw a sharp increase in bad loans.

• The third episode of banking sector troubles has several causes: – The growth collapse after 2012– A credit bubble as bank loan growth exceeded nominal economic growth– poor governance

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Challenges

• How should the government deal with the pile of bad loans in the balance sheets of the banks it owns?

• How should public sector banks be encouraged to think strategically rather than tactically?

• Thus Governance, Capital, Overall Economic Reforms and NPAs are bigger challenges.

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## Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interest (SARFAESI) Act 2002• Upon loan default, banks can seize the

securities without intervention of the court except agricultural land.

• SARFAESI is effective only for secured loans • However, if the asset in question is an

unsecured asset, the bank would have to move the court to file civil case against the defaulters.

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• A Bank can do under this act1. Take possession of the security for the loan 2. Sale or lease or assign the right over the security 3. Manage the same or appoint any person to

manage the same • Notice to clear dues in 60 days.• Provide for Asset Reconstruction Companies

(ARCs).

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• The bad loans of public sector banks were at 4.4 per cent in March 2014 compared with 2.09 per cent in 2008-09.

• The gross NPA increased by almost four times from in last 5 years.

• Infrastructure, textiles, iron and steel, mining and aviation were the five sectors that accounted for almost 23-24 per cent of bank advances.

• Public sector banks alone have a share of 85-90 per cent total loans. The stress accounts are 55 per cent in these five sectors.

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New Development

• The working group of RBI, headed by Usha Thorat, had recommended that the Act be extended to cover the NBFCs also.

• Upon loan default, banks can seize the securities (except agricultural land) without intervention of the court.

• SARFAESI is effective only for secured loans where bank can enforce the underlying security.

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## Governance of the Boards of Banks in India Committee- PJ Nayak

• Scrapping of Bank Nationalisation Acts, SBI Act and SBI (Subsidiary Banks) Act.

• Converting all PSBs into Companies under the Companies Act.

• Formation of a “Bank Investment Company” (BIC) under the Companies Act and transfer of all Shares held by the Central Government in PSBs to the newly formed BIC.

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• BIC would transfer controlling authority to Bank Boards.

• BIC Objective: Return on Investment• BBB- Bank Board Bureau: 3 Serving o retired

Chairpersons of Bank.• Reduction of Government’s share-holding to

40%.

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• Cases of vigilance enforcement only if the director or employee personally made a wrongful gain. (Evidence of Self Benefit)

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One more thing…

• More focus on Issues such as risk management, strategic planning and business performance

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Thank You.

• For any feedback/query/word of thanks, the Tutor can be contacted at harveersinh@gmail.com