What plagues the Indian banking system? To understand that, we may have to go back a few decades — to the former Federal Reserve chairman Alan Greenspan taking a leisurely bath in a tub. It is then that he thought of the term “irrational exuberance”, when he was writing a speech. It has since come to describe a dangerous optimism that can wreck the financial system, and a wave of that hit the Indian banking system from 2003.
The economy was doing well and banks were happily giving away loans to money-guzzling projects. There were other factors at play as well — borrower companies’ inflating bills, commercial banks lending for infra projects without having the ability to assess the risk competently and political interference (with ministers nudging bankers to give loans to dodgy businessmen). And then hit the 2008 crisis. Repayment was tough and banks resorted to their old trick — evergreening of loans.
When Raghuram Rajan took over in 2013 as the Reserve Bank of India (RBI) governor, public sector banks (PSBs) were saddled with bad loans. He tightened the screws, and PSBs were forced to recognise non-performing assets (NPAs). By 2016-end, the war against NPAs was still in progress, but Rajan had to leave midway, when the Modi-government didn’t give him a second term.
Then, the central government announced its intent to reduce the number of public sector banks in August 2017. Big, they thought, would be better. But as Abhishek Murarka, analyst and VP, IIFL Institutional Equities, says: “Merging several smaller entities with essentially similar problems into one large entity does not solve the problem.” That September, Rajan raised his concern about the consolidation of PSBs without cleaning up their balance sheets. He pointed out that the banks were already weak, and that a merger would simply put an administrative hurdle in their functioning.
But Rajan’s objections seem to have fallen on deaf ears. This August 30, the government announced that 10 PSBs will be merged to four, even while the original banks are struggling with thei