Reforms, stressed assets and under-capitalization of PSBs feature in Dr. Hasmukh Adhia’s special lecture at IIMB
Dr. Hasmukh Adhia speaks to IIMB students on ‘Monetary Policy in Advanced and Emerging Countries – Comparison and Contrasts’, on July 3, 2015. He was invited to speak to the students of the course offered by Dr. Charan Singh, RBI Chair Professor of Economics, IIMB.
July 03, 2015: Dr. Hasmukh Adhia, Secretary, Department of Financial Services, Ministry of Finance, Government of India, addressed students at IIM Bangalore on financial sector reforms in India, focussing on various schemes and measures initiated during the last one year by the Government.
Dr. Adhia was invited to speak to the students of the course offered by Dr. Charan Singh, RBI Chair Professor of Economics, titled ‘Monetary Policy in Advanced and Emerging Countries – Comparison and Contrasts’.
In response to a question from the students whether stressed assets were a matter of concern, he replied: “Yes and No”. While he agreed that the gross NPAs in Public Sector Banks (PSBs) had increased to 5.2 per cent of their advances and total stressed assets including restructured assets had risen to 13.2 per cent, but he said, in 2001, when the concept of restructured assets was non-existent, NPAs of public sector banks was at 13 per cent. “This came down to 2.3 per cent in 2008. And there are understandable reasons for the rise in stressed assets of PSBs as between 2008 and 2011 – most infrastructure projects were financed by PSBs. However, many of the projects got held up due to various reasons such as land acquisition, gas prices, cancellation of coal allocation, and overall slowdown in the world economy. During this period, NPAs of the private banks were much higher than those of PSBs and they were reluctant to invest in infrastructure projects, and also there were obstacles in credit expansion for this sector. The economy was passing through a critical time that many projects were not been able to take off,” he explained.
On the subject of under-capitalization of PSBs, Dr. Adhia observed that it was not the case as India observed higher rates of capitalization than prescribed by the Basel norms due to the fact that RBI had put an extra margin for buffers, placing PSBs in a very safe zone. If more capital has to be raised, he said, one of the solutions was that the Government’s share could be brought down to 52 per cent. “As of now, all PSBs are meeting all Basel 3 norms adequately.”
Individual banks, he stated, had been interacting with the Government, presenting their strategies to raise capital by other means. “So far about 21 banks have provided inputs on their capital requirements. The Government expects a certain level of commitment from the PSBs. Accordingly, specific efficiency parameters are being determined by the government and the PSBs would be rewarded for their performance on these parameters. These parameters, amongst others, could include return on net worth, return on assets, and cost to credit ratio. Buffer capital would be required to meet such requirements. Government has decided to infuse Rs. 79400 crore of capital into banks and the Finance Minister has already indicated to look into their additional requirements,” he said.
On governance and banking sector reforms, Dr. Adhia mentioned about the announcement of forming a Bank Board Bureau, to act as a body so as to monitor the performance of PSBs as also to guide them. This bureau, he explained, would be a kind of a link between the government and the banks. “As against the erstwhile combined designation of a Chairman and Managing Director, there would now be a distinction between non-executive chairman as well as Managing Director (MD),” he said. Dr. Adhia emphasized that for the first time, the MD’s position of five big banks had been opened to private sector bankers also. “A new system of recruitment has been brought in, wherein specific criteria such as age, qualification, kind of experience and expertise would be assessed. Also, a website has been created, where eligible people can apply for an appointment of independent directors on the board of PSBs,” he said.
In the area of financial inclusion, he pointed out that the Government was attempting to address issues of banking the unbanked, funding the unfunded and social security schemes. “After so many years of independence, people do not have bank accounts. With a Mission Mode campaign of the Government, 16 crore new bank accounts have been opened and the zero-balance accounts have come down from 80 per cent to 52 per cent in a few months. The benefit of LPG transfer amount has helped in bringing down zero balance accounts for urban consumers. However, there are many other similar schemes in rural areas which once implemented will make many of these bank accounts operational,” he said. “Further, around 80,000 people have already availed of overdraft facility so far and many more are being offered under this under ‘Jan Dhan’. The Government is encouraging banking institutions to inform the account holders about the overdraft facilities. The purpose of ‘Jan Dhan Yojana’ is to use bank accounts for meeting small credit needs of people.”
The motive of funding the unfunded, he said, was to provide finance to the small businesses who have nearly no sources of funding but for the moneylenders. The MUDRA bank, he announced, would help create credit for non-agricultural activities, including small businesses and industries, handicrafts and handlooms. The two main objectives of MUDRA bank would be to develop the micro finance sector and lower the interest rates. The loans under this scheme would be below Rs. 10 lakh. The small loans in the country are best provided by the micro finance institutions which have a high rate of recovery, but the micro finance sector in India is still nascent. Dr. Adhia promised that the Government would make efforts to develop this sector by providing guarantees to the MFIs, which would help bring down the interest rates and hence allow more people to avail these loans. In the previous year, banks had provided Rs. 50,000 crore to micro and small units. This year Government is trying to increase this to one lakh crore so that small units are not starved of financial resources.
On the insurance front, he drew attention to the fact that not more than 20 per cent people had some form of insurance cover in India. The Government has introduced a scheme where an insurance cover of Rs. 2 lakh, in case of accidental death, would be provided for the poor at a premium of Rs. 12 per annum. The insurance schemes are linked to bank accounts, furthering the cause of financial inclusion as well as helping people to inculcate banking habits. The objective of making people pay a nominal premium is basically to make them aware of such schemes and provide them with a sense of participation to ensure higher volumes of claims. This will also help people to get familiar with banking and financial services which is an important requirement for financial inclusion. This also results in advancing financial literacy. “The Government has to work on its financial literacy campaign to make these schemes work and the bank accounts operational. Since the claim ratios in group insurance schemes have been very low, the Government is trying to provide a direct insurance product and along with it make people aware of these services,” Dr. Adhia said.
When it came to the issue of social security, he said, only 11 per cent of population was covered by some form of pension. “A poor person should be able to understand the concept of pension through bank account. The account holders under the program will get a minimum pension of about Rs. 1,000 – 5,000, which would make it easier for the people to decide and join the scheme. The Government is also trying to implement the co-contribution scheme where the Government will pay on behalf of the citizen, 50 per cent of the premium or Rs. 1,000 whichever is lesser. This will help reduce the burden on the person opening the account,” he explained.
Reforms, stressed assets and under-capitalization of PSBs feature in Dr. Hasmukh Adhia’s special lecture at IIMB
Dr. Hasmukh Adhia speaks to IIMB students on ‘Monetary Policy in Advanced and Emerging Countries – Comparison and Contrasts’, on July 3, 2015. He was invited to speak to the students of the course offered by Dr. Charan Singh, RBI Chair Professor of Economics, IIMB.
July 03, 2015: Dr. Hasmukh Adhia, Secretary, Department of Financial Services, Ministry of Finance, Government of India, addressed students at IIM Bangalore on financial sector reforms in India, focussing on various schemes and measures initiated during the last one year by the Government.
Dr. Adhia was invited to speak to the students of the course offered by Dr. Charan Singh, RBI Chair Professor of Economics, titled ‘Monetary Policy in Advanced and Emerging Countries – Comparison and Contrasts’.
In response to a question from the students whether stressed assets were a matter of concern, he replied: “Yes and No”. While he agreed that the gross NPAs in Public Sector Banks (PSBs) had increased to 5.2 per cent of their advances and total stressed assets including restructured assets had risen to 13.2 per cent, but he said, in 2001, when the concept of restructured assets was non-existent, NPAs of public sector banks was at 13 per cent. “This came down to 2.3 per cent in 2008. And there are understandable reasons for the rise in stressed assets of PSBs as between 2008 and 2011 – most infrastructure projects were financed by PSBs. However, many of the projects got held up due to various reasons such as land acquisition, gas prices, cancellation of coal allocation, and overall slowdown in the world economy. During this period, NPAs of the private banks were much higher than those of PSBs and they were reluctant to invest in infrastructure projects, and also there were obstacles in credit expansion for this sector. The economy was passing through a critical time that many projects were not been able to take off,” he explained.
On the subject of under-capitalization of PSBs, Dr. Adhia observed that it was not the case as India observed higher rates of capitalization than prescribed by the Basel norms due to the fact that RBI had put an extra margin for buffers, placing PSBs in a very safe zone. If more capital has to be raised, he said, one of the solutions was that the Government’s share could be brought down to 52 per cent. “As of now, all PSBs are meeting all Basel 3 norms adequately.”
Individual banks, he stated, had been interacting with the Government, presenting their strategies to raise capital by other means. “So far about 21 banks have provided inputs on their capital requirements. The Government expects a certain level of commitment from the PSBs. Accordingly, specific efficiency parameters are being determined by the government and the PSBs would be rewarded for their performance on these parameters. These parameters, amongst others, could include return on net worth, return on assets, and cost to credit ratio. Buffer capital would be required to meet such requirements. Government has decided to infuse Rs. 79400 crore of capital into banks and the Finance Minister has already indicated to look into their additional requirements,” he said.
On governance and banking sector reforms, Dr. Adhia mentioned about the announcement of forming a Bank Board Bureau, to act as a body so as to monitor the performance of PSBs as also to guide them. This bureau, he explained, would be a kind of a link between the government and the banks. “As against the erstwhile combined designation of a Chairman and Managing Director, there would now be a distinction between non-executive chairman as well as Managing Director (MD),” he said. Dr. Adhia emphasized that for the first time, the MD’s position of five big banks had been opened to private sector bankers also. “A new system of recruitment has been brought in, wherein specific criteria such as age, qualification, kind of experience and expertise would be assessed. Also, a website has been created, where eligible people can apply for an appointment of independent directors on the board of PSBs,” he said.
In the area of financial inclusion, he pointed out that the Government was attempting to address issues of banking the unbanked, funding the unfunded and social security schemes. “After so many years of independence, people do not have bank accounts. With a Mission Mode campaign of the Government, 16 crore new bank accounts have been opened and the zero-balance accounts have come down from 80 per cent to 52 per cent in a few months. The benefit of LPG transfer amount has helped in bringing down zero balance accounts for urban consumers. However, there are many other similar schemes in rural areas which once implemented will make many of these bank accounts operational,” he said. “Further, around 80,000 people have already availed of overdraft facility so far and many more are being offered under this under ‘Jan Dhan’. The Government is encouraging banking institutions to inform the account holders about the overdraft facilities. The purpose of ‘Jan Dhan Yojana’ is to use bank accounts for meeting small credit needs of people.”
The motive of funding the unfunded, he said, was to provide finance to the small businesses who have nearly no sources of funding but for the moneylenders. The MUDRA bank, he announced, would help create credit for non-agricultural activities, including small businesses and industries, handicrafts and handlooms. The two main objectives of MUDRA bank would be to develop the micro finance sector and lower the interest rates. The loans under this scheme would be below Rs. 10 lakh. The small loans in the country are best provided by the micro finance institutions which have a high rate of recovery, but the micro finance sector in India is still nascent. Dr. Adhia promised that the Government would make efforts to develop this sector by providing guarantees to the MFIs, which would help bring down the interest rates and hence allow more people to avail these loans. In the previous year, banks had provided Rs. 50,000 crore to micro and small units. This year Government is trying to increase this to one lakh crore so that small units are not starved of financial resources.
On the insurance front, he drew attention to the fact that not more than 20 per cent people had some form of insurance cover in India. The Government has introduced a scheme where an insurance cover of Rs. 2 lakh, in case of accidental death, would be provided for the poor at a premium of Rs. 12 per annum. The insurance schemes are linked to bank accounts, furthering the cause of financial inclusion as well as helping people to inculcate banking habits. The objective of making people pay a nominal premium is basically to make them aware of such schemes and provide them with a sense of participation to ensure higher volumes of claims. This will also help people to get familiar with banking and financial services which is an important requirement for financial inclusion. This also results in advancing financial literacy. “The Government has to work on its financial literacy campaign to make these schemes work and the bank accounts operational. Since the claim ratios in group insurance schemes have been very low, the Government is trying to provide a direct insurance product and along with it make people aware of these services,” Dr. Adhia said.
When it came to the issue of social security, he said, only 11 per cent of population was covered by some form of pension. “A poor person should be able to understand the concept of pension through bank account. The account holders under the program will get a minimum pension of about Rs. 1,000 – 5,000, which would make it easier for the people to decide and join the scheme. The Government is also trying to implement the co-contribution scheme where the Government will pay on behalf of the citizen, 50 per cent of the premium or Rs. 1,000 whichever is lesser. This will help reduce the burden on the person opening the account,” he explained.