Banking Sector Reforms

[op-ed snap] Banking on politics

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Bank mergers; Money in Politics

CONTEXT

India’s economic crisis is partly due to the decline of investments, which is partly due to the fact that companies cannot get access to loans as easily as before. This is a direct consequence of the huge level of the banks’ Non-Performing Assets (NPAs).

State of NPAs

  • NPAs have jumped from Rs 1.2 trillion in 2012 to 9.5 trillion in 2018. 
  • Public banks represented 70% of these NPAs.

On Bank Mergers

  • Centre announced reforms in the banking system which are mostly the mergers of weak banks

Background to the NPAs

  • Why did the public sector banks lent so much money to companies which are today unable to pay it back? 
  • In the 2000s, everybody thought that double-digit growth rates were there to stay and practised aggressive lending. This practice did not stop even in 2014.
  • In 2015, a 57-page report of Crédit Suisse gave a detailed account of the debts accumulated by a dozen big Indian companies. 
  • Soon after that, the RBI declared 12 Indian companies responsible for 25% of the NPAs. 
  • The Crédit Suisse report showed that companies facing heavy debts continued to borrow from the banking system. The Adani group’s debt, for instance, increased by 16% in 2015.
  • The piling up of the NPAs has to do with the relationship between the country’s rulers and the heads of the public banks
  • Crony capitalism – the nexus between businessmen and politicians is based on an exchange of favours: The former help the latter to get access to credit in return for funds for election campaigns.

Politics and money

  • According to several estimates — by the Centre for Media Studies and the Association for Democratic Reforms — India’s 17th general elections were the costliest ever in the history of democracies. Parties have spent $7.2 billion. 
  • Cash, drugs, liquor and precious metals worth nearly Rs 3,500 crore were reportedly seized by enforcement agencies in the run-up to the Lok Sabha polls.
  • Political parties were able to amass money due to a scheme authorising businesses and individuals to make anonymous contributions to political parties — electoral bonds
  • The ruling party reaped 95% of the contributions through such bonds which former Chief Election Commissioner S Y Qureshi, described as “legalisation of crony capitalism”.
  • Alt News scrutinised the Ad Library Report of Facebook to find out that pro-BJP and pro-central government pages represented 70% of the total ad revenue made public by Facebook. Of the top 10 political advertisers, eight were related to the BJP and spent Rs 2.3 crore on Facebook ads. 
  • The BJP spent about Rs 6 crore on political ads on Google platforms, 10 times more than the Congress. 
  • Unofficial BJP Facebook pages, such ‘Bharat ke Mann ki Baat’, ‘Nation with NaMo’ and ‘My First Vote for Modi’ cumulatively spent Rs 4.50 crore in the same period.

Way ahead on banking reforms

  • Protection of the banks’ CEOs from political interferences. 
  • Privatisation – the private banks are not as badly affected by the NPAs as the public ones.
  • More rigorous management autonomy under the aegis of a robust regulator.
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