[ Role of Banks ] Fuelling growth – Business Line–21.03.2018

The emerging narrative on the Indian economy, spelt out by the Economic Survey 2017-18 and affirmed by World Bank and credit ratings agency Fitch last week, is of one that has shrugged off the blues and is set to achieve 7.3 per cent growth in 2018-19 and 7.5 per cent and above thereafter.
Indeed, high frequency indicators — such as the index of industrial production (up 7.5 per cent in January), merchandise exports (up 11 per cent in dollar terms this fiscal, against 4 per cent in April-February 2016-17), and bank credit growth (11.5 per cent as on the fortnight ended March 2) — lend credence to this new-found optimism.
International agencies have argued that the banking system needs to be thoroughly restructured if growth is to surpass 8 per cent.
However, in their efforts to restore order and accountability in public sector banks, particularly in the wake of the Punjab National Bank scam, the Centre and the RBI should refrain from injecting a climate of fear among bankers, which could translate into a credit freeze. If GST and demonetisation acted as party poopers in 2017-18, a catatonic banking system could slow down the economy in the coming fiscal and the next.
The recent signs have not been encouraging. If reports on a return to consortium lending for big ticket loans are to be believed, this will greatly slow down the sanction of large loans.
Fearing an overzealous vigilance apparatus, senior bank officials, with just a few years to go before they retire, may play safe and turn down loan proposals. Rather than merely wield the bludgeon, under the ‘prompt corrective action’ framework, the Centre should bring on board the sidelined Banks Board Bureau to improve governance in public sector banks. The most crucial step is to restructure loan disbursement by creating specialisations or verticals. A branch manager, in her capacity as a generalist, can feed information into these verticals and bring business to the branch concerned without, however, being crucially involved in areas that require specialised knowledge. Rather than merely take potshots at the Centre over appointments to bank boards, the RBI should sort out lapses in its oversight functions. Above all, it should be appreciated that loan disbursement involves a level of business risk that needs to be rewarded. Defaults that occur due to sudden changes in the business environment, such as the global financial crisis, should be distinguished from those that smack of foul play. As for the PNB scam, it amounts to a distinct sort of fraud that cannot be conflated with the rest.
About two decades after the shift away from domestic financial institutions which specialised in long-term finance, to universal banking, it is becoming evident that banks lack the expertise to engage in project finance. The earlier institutional architecture could be reconsidered, for long-term finance — and long-term growth — to take root.

via Fuelling growth – Business Line

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