Budget 2022: Banking sector not expecting big bang reforms but implementation of last year's announcements

Finance Minister Nirmala Sitharaman has set the benchmark high by announcing a series of pathbreaking reforms in last year's Budget which included the bad bank and a developmental financial institution (DFI) for infrastructure financing.

While this year's Budget may not have those big bang announcements, the focus could be on operationalizing these institutions and setting the ball rolling.

In order to embark on a path of rapid growth, the country needs a supportive, strong and robust banking sector. Lack of skill to assess mega infrastructure projects on the part of the traditional bankers, complexities in various clearances required for such projects, and the demand and supply mismatches have resulted in the deterioration of asset quality to unprecedented levels.

While the government has shown its intention to resolve the impediments there is a need to go beyond existing policy prescriptions and look at disruptive methods to address these issues.

Set things in motion

It has been almost six months since the government has given guarantees of Rs 30,600 crore to back security receipts (SRs) issued by NARCL for acquiring stressed loan assets. It is high time that the banks should get the requisite regulatory clearances from the Reserve Bank and acquire those stressed assets. NARCL has proposed to acquire stressed assets of about Rs 2 lakh crore in phases of which about Rs 90,000 crore of assets are expected to be transferred in the first phase. It intends to acquire these through 15 percent cash and 85 percent in Security Receipts (SRs). While the big bad loans can be addressed later, at least the banks can start with smaller accounts and figure out the challenges before taking up more complex cases.

Set up a team to devise innovative financing solutions

While National Bank for Financing Infrastructure and Development (NaBFID), the newly set up development finance institution for infrastructure finance is expected to start disbursal of capital from April 2022, it is important to set up a team that comes out with innovative financing solutions. The institution has already identified 193 projects above Rs 1,000 crore each which are there under the National Infrastructure Pipeline (NIP). It is high time that all due diligence should be done and a common framework is prepared which can be replicated on other projects.

The privatisation wagon

Already the private banks have occupied 40 percent of the banking space, which was a mere 10 percent around three decades ago. In a transitional society such as ours, we need both private and public sector lenders. Traditionally, the PSBs are known to have carried the burden of implementing government schemes. While the government may go for privatisation as announced in last year's Budget, it could look at other measures to strengthen the public sector institutions.

In that aspect, the biggest reform could be in upskilling public sector bank (PSB) employees. The service conditions must improve in banking sectors so that we get and retain the best talent. Besides ESOPs, there should be other incentives to make employees more involved with the success story of their bank. The government will do well to consider the long-standing demands for a dearness allowance (DA) merger and updating of pension in line with that of RBI pensioners.

Remove 20% FDI limit in state-run banks

The government could go ahead and remove the 20 percent foreign direct investment limit in state-run banks. This may address the issue of infusing capital in these lenders for a longer duration.

While in the past, banking and the financial sector in the country were severely harmed in the name of aggressive lending, it also needs to be recognized that every business decision is not underlined by bad intentions. Today, there is a need to create innovative financial products for those working in the informal sector and the government will do well if it provides its bankers with the necessary support to take those challenges head-on.

The author is Senior Advisor, Indian Banks' Association. Views are personal.

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Bikash Narayan Mishra