READ EDITORIAL WITH D2G EP – LXXVIII

In Read Editorial With D2G
February 13, 2016

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EPISODE – LXXVIII
TOPIC: Banks Ultimately Need Autonomy
BLOG: The Hindu
WRITER: The Editorial
GENRE: Opinion

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D2G wears no responsibility of the views published here by the respective Author. This Editorial is used here for Study Purpose. Students are advised to learn the word-meaning, The Art of Writing Skills and understand the crux of this Editorial.

MEANINGS are given in BOLD and ITALIC

Banks, it is often said, are the fulcrum (a thing that plays a central or essential role in an activity) of a robust (strong and healthy) economy. Healthy banks are an essential prerequisite (required as a prior condition) for placing the economy on a higher growth orbit. The banking scene in India, however, presents an absolutely scary (frightening or alarming) picture. A combination of factors ranging from poor credit appraisal (an expert estimate of the value of something) to political interference and mismanagement by borrowers have conspired (plan) to push the banking industry into a messy cobweb (a spider’s web). Bank after bank, especially the government-owned, has come out with poor third-quarter results.

The stressed assets (comprising gross non-performing assets plus written-off assets and restructured assets) account for 14.1 per cent of total bank loans as of September 2015, up from 13.6 per cent in March 2015. For public sector banks, the stressed assets were in the vicinity (state or fact of being near; proximity) of 17 per cent at the end of September, while the figure for private sector banks stood at 6.7 per cent. The rising stress level, or increase in bad loans, has yielded a twin fallout (the adverse side effects) — of declining profitability at banks and poor credit disbursal. The double effect is already telling on the economy in various ways. For long, banks have either managed to, or rather been allowed to, keep the stress invisible, giving the outside world very little clue as to the happenings inside the industry.

The Reserve Bank of India under Raghuram Rajan’s stewardship (management), however, has decided to clean up banks’ books rather than letting them camouflage (cover or disguise) the real picture. “There are two polar approaches to loan stress,” he said at the CII Banking Summit in Mumbai this week. “One is to apply band-aids to keep the loan current, and hope that time and growth will set the project back on track. Sometimes this works. But most of the time, the low growth that precipitated the stress persists (continue to exist; be prolonged.). The fresh lending intended (plan) to keep the original loan current grows. Facing large and potentially un-payable debt, the promoter loses interest, does little to fix existing problems, and the project goes into further losses.” Indeed, legacy problems should be given a burial, and should not be allowed to persist. So hinting, Dr. Rajan articulated (express (an idea or feeling) fluently and coherently) the need for surgical action to retrieve (get or bring (something) back) the health of the industry.

Forcing banks to recognise a problem is one thing, and finding a viable (capable of working successfully; feasible.) long-term solution to it is quite another. That requires not just holistic (relating to or concerned with complete systems rather than with individual parts) thinking but an out-of-the-box approach as well, especially in the evolving (developing gradually) global context. A meaningful fix can happen only if banks are given functional autonomy (freedom from external control or influence) at various levels. Restricted freedom inevitably (certain to happen; unavoidable) leads to a blame game, making it even more difficult to fix responsibility. The concept of arm’s- length relationship (condition or the fact that the parties to a transaction are independent and on an equal footing) especially needs to be clearly defined and implemented in letter and spirit in the banking industry. It is not just about how much money the Central government will freshly pump into stressed banks. The litmus test (a test in which a single factor is decisive) for the government lies in its ability, and capacity, to let go of control. The banking system indeed needs a change in the way it is managed.