Rain-Bow

Multi-coloured and perhaps the only feather in the cap of finance minister Arun Jaitley is supposedly the banking reforms. Opening of bank accounts, followed by loading of various insurance and pension benefits was the first part of this narrative.   

Proudly the government wears the certification from Guinness Book of World Records on opening most bank accounts in a week. It also does not fail to mention that how increasingly most of these accounts have seen a spurt in deposits thus ensuring that they do not remain dormant. 

Then there is the unsaid promise that once the government finally gets a hold on hoarders of black money abroad, some of it will flow into these accounts and the prophecy of Jan Dhan will be fulfilled. Some naysayers, however, predict that the government may dole out cash in the grab of subsidies at the fag end of its stint. In both cases it only looks like the proverbial gold pot at the end of the rainbow. 

But it was the second spate of reforms that was said and meant to be more qualitative than quantitative. In August 2015, the rainbow was launched. Dubbed as Indradhanush, the government ushered a seven pronged plan to free the public sector banks in India from the clutches of crony capitalism being pursued during the tenure of previous government.

Mr Jaitley at various fora has eulogized these measures as path breaking and that which changed the landscape of banking in this country.

But if you look closely, Mr Jaitley and his lieutenants have only rearranged the VIBGYOR, with little or no effect. 

Through Indradhanush, the government promised a comprehensive reform in state run lenders. So far, it has appointed only two private sector candidates in the top five public sector banks, and one of them had previously worked with country’s largest lender, State Bank of India.

In line with the Reserve Bank of India (RBI) suggestions, the post of chairman and managing director has also been split. Though the verdict on appointing private sector guys and splitting the post is yet to be out, till date none of these newly appointed heads has embarked upon an innovative approach.

Then comes the appointment of independent directors, which the government had promised to do in three months. There has been no movement on that. The proposed bank board bureau, where members were to be selected in six months has not seen any action too.

The government which revamped the selection process of top executive in PSBs and had cancelled appointments done by previous government has also done little to revolutionize the selection process. It has only divided the existing selection committee into three groups and added one more member with rest of the process being mostly the same. 

The government promised Rs 70,000 crore towards bank capital allocation till FY 2019. It said it has ‘estimated’ the capital needs and that banks valuations will increase significantly due to ‘far reaching governance reforms’ helping them to raise the remaining capital from the markets. 

The UPA government in its last stint had allocated around Rs 62,000 crore towards bank capital allocation when the more stringent Basel norms were yet to be set in and banks enjoyed the leeway to manage their books and hide their non-performing loans. 

If not for RBI’s asset quality review (AQR), the bad loans may have never tumbled out of the closet. The AQR directly resulted in most banks reporting losses or a sharp drop in third-quarter profit. Gross non-performing assets (NPAs) of many banks have since climbed to nearly 10%, thus stripping them of the government’s ‘estimate’ that they will be able to raise over Rs 1 lakh crore from the markets. 

Step down from the rainbow, and the banking sector in the country doesn’t look that it has moved much ahead. There has been no talk of consolidation in public sector lenders. The weak banks are not to be on the block and the large banks are still averse to mergers. 

Mr. Jaitley like always may argue that the legacy issues are too big to be sorted out this quickly. The rainbow, however, mostly comes after a shower, and for now it looks like it will pour, and pour hard.