Lockdown Read

Tamal’s latest book takes you on a roller-coaster ride in search of an answer to some compelling questions on the Indian banking system. It narrates a compelling story of the rot in India’s banking system – how promoters easily swapped equity with debt as bank managements looked the other way to protect their balance sheets, till the RBI began waging a war against ballooning bad loans. 

Tamal is neither a banker nor an economist but a keen watcher of the banking industry. He covered the banking segment for the financial newspaper, Mint for more than eleven years. That has given him an opportunity to understand the banking system. The author had also been able to take a ringside view of the banking industry while working as a Senior Adviser to Jana Small Finance Bank and an adviser on strategy for Bandhan Bank. You may or may not agree with his prescription in his voluminous work, but you cannot question his sincerity. 

Tamal has tried to identify the reason for the ailments of public sector banks that have served as the backbone of India’s financial system. Is it government ownership, or the conduct of the leadership? And just when many were rooting for privatisation as a way out, powerful bankers such as Chanda Kochhar and Rana Kapoor exposed the soft underbelly of the seemingly more efficient and profitable private banks of India. 

In the preface, Tamal refers to Akira Kurosawa’s iconic film Rashomon, a metaphor for different, and often conflicting versions of the same event. For Indian banking, the metaphor is rather apt. At the best, to use the same metaphor, it is the woodcutter’s story, not the commoner’s perspective. Rashomon would not have become such a great film without Kazuo Miyagawa as its cinematographer. To chronicle what Tamal calls the great Indian banking tragedy, we need an external, objective and dispassionate observer as a cinematographer. If you are inside the system, you may know everything about it, but you may have no sense of its place and function in the bigger picture. For years and years, Tamal has been, and still is, a widely read business journalist, across newspapers, especially on banking and finance. That brings an investigative flair and felicity in his use of language. 

Why should there be a great tragedy in the Indian banking system? Across indicators – prevention of bank failures, number of banks (commercial, payments banks and small finance banks), bank branches and ATMs, deposits, bank credit, gross domestic product (GDP), banking standards, use of technology, digitisation, measures of financial inclusion – there have been improvements over time. Reforms, however defined, have much to do with competition and efficiency in factor markets (land, labour, capital). Banking constitutes a critical strand of capital market reforms.

While privatisation of public sector banks (PSBs) is not yet on the agenda, there has been competition through the entry of the private sector. Competition requires exit, as well as entry. The 2016 Insolvency and Bankruptcy Code (IBC) has ensured an exit for errant promoters. There is a regulator for banks, though less starkly so for non-banking financial companies (NBFCs). Within that broad reform template, there is quite a bit the country has got. 

Tamal says that governments should regularly review whether an enterprise is still necessary and whether it delivers value for the taxpayers’ money. For example, Germany conducts biennial reviews. The case for a state-owned enterprise in competitive sectors, such as manufacturing, is weaker because private firms usually provide goods and services more efficiently.

Countries need to create the right incentives for managers to perform and government agencies to properly oversee each enterprise. Full transparency in the activities of enterprises is paramount to improving accountability and reducing corruption. Including state- owned enterprises in the budget and debt targets would also create greater incentives for fiscal discipline. Many aspects of these practices are in place, for example, in New Zealand. 

Governments also need to ensure that state-owned enterprises are properly funded to achieve their economic and social mandates, as in Sweden. This is critical in responding to crises – so that public banks and utilities have enough resources to provide subsidised loans, water, and electricity during this pandemic – and in promoting development goals. 

Ensuring a fair playing field for both state-owned enterprises and private firms would have positive effects by fostering greater productivity and avoiding protectionism. 

Why should there be a tragedy in the Indian banking system?

Some countries like Australia and regions like the European Union, already limit preferential treatment of state-owned enterprises. Globally, a potential way forward is to agree on principles to guide international behaviour of state-owned enterprises. 

The stakes are high. Well-governed and financially healthy state-owned enterprises can help combat crises such as the pandemic and promote development goals. However, to deliver on these, many need further reforms. Otherwise, the costs to society and the economy can be huge. 

Half a decade has been lost since the RBI decided to remove the tumour of bad loans in 2015. The RBI’s desire to act decisively was not to the liking of the government. If the government continues to remain in denial about the state of public sector banking, India will go the Japan way. It is high time that both the government and the central bank aligned their actions to recognise the mess and cleaned up banking, once and for all. The government uses its clout as the majority owner to make the PSBs act in an unsustainable manner.

Meanwhile, the RBI goes overboard, tinkering with regulations to make up for supervisory failures. 

Many say that excessive regulations stifle India’s banking industry in somewhat the same way that over-regulation has prevented the free development of the labour market. As a result, while the informal economy is the biggest source of employment, a large section of the population continues to depend on informal sources of finance – they do not have full access to the formal banking system.

At the end of this book, Tamal tries to seek an answer to a question: Has India let down its banking system or, is it the other way round? Probably, the blame should be shared. The banking regulator could have encouraged competition by allowing many more banks to set up shop. It has not done so and hence, financial repression continues.

The banks too have not explored the phenomenal opportunities that the world’s second most populous nation offers. There are millions of borrowers and savers in the hinterland of India but very few banks seek to identify and exploit the business opportunities there. Some banks go there only under compulsion; while others stay away. 

Everyone ends up losing in the end.