Banking on Fintech
Over the past year and a half, the Indian banking system – especially the public sector banking bit – has been in the news for all the wrong reasons. The non-performing assets (NPAs) of many public sector banks (PSBs) have been rising inexorably. At the end of September 2017, the public sector bank NPAs stood at ` 7.34 lakh crore while private sector bank NPAs had touched ` 1.03 lakh crore. As many of the NPAs headed to the National Companies Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code (IBC), it was apparent that banks would need to take steep haircuts on their loans, and would get back a fraction of what they were owed at the end of the resolution process.
In February this year, the Nirav Modi affair also burst into light after Punjab National Bank complained about fraudulent Letters of Undertaking (LoUs) of $1.77 billion, since raised to $1.97 billion. The exact amount that the bank is going to lose because of Nirav Modi’s firms (and the companies run by his uncle Mehul Choksi) is yet to be clear. Since then, a number of other NPA scams have hit the headlines – including the Rotomac NPAs (based on the complaint of Bank of Baroda) and the Simbhaoli Sugar case (based on a complaint by Oriental Bank of Commerce). And more scams seem to be lurking in the balance sheets of many banks, just waiting to be unearthed. Finance Secretary Rajiv Kumar has given the PSBs 15 days for taking pre-emptive action for identifying gaps that allows for scams. The finance ministry is reportedly planning to consolidate overseas branches of PSBs.
These steps are unlikely to be enough. There have been calls for privatisation of all PSBs barring SBI. But the finance minister has already ruled that out as an option. So, the clean-up needs to be done using other means. I think the Reserve Bank of India is already quite a strict regulator, and has prescribed stringent norms for banks. But I think the government, as the majority owner of the PSBs, also needs to understand that it should take drastic steps to clean up the problems. First, it has to look at the entire issue of staffing – from choosing the top management correctly, to giving them enough of a free hand and long tenure to do their job properly, to figuring out how to induct high-quality people at every level – junior, mid and senior – and equally, firing the incompetent ones. Also, once that is done, it needs to protect the bank managements from political pressure.
Meanwhile, this is also our Best Banks special issue where we highlight the stories of the best in the banking system. This year, we have introduced a new category – financial tech. While a number of fintech companies have shot into prominence in the past few years, I believe the journey is only starting. And in the next few years, the entire banking industry will be revolutionised by the march of the fintechs.