Financial sector: The year gone by was tumultuous, but will 2019 be better?

While 2018 was marked by scams, regulatory crackdowns and the RBI-Centre spat, the likelihood of some PSU banks coming out of the PCA framework could boost credit growth in 2019

It began with the unearthing of the fraud perpetuated by Nirav Modi at Punjab National Bank’s Brady House branch in Mumbai, which exposed the lapses in supervision and internal controls at one of India’s largest public sector banks.  

Then, on February 12, 2018, the Reserve Bank of India (RBI) issued a circular mandating lenders to begin the resolution process of any large account, if the borrower had delayed payments by even a single day. Lenders were given a maximum of 180 days to come up with a resolution. In case that didn't happen, banks were directed to initiate insolvency proceedings against borrowers under the insolvency and bankruptcy code (IBC). The circular was vehemently opposed by sections of the industry and with even the government asking for relaxation of the terms.  

Further, in September, Infrastructure Leasing and Financial Services (IL&FS), part of the IL&FS group, defaulted on its debt obligations. The default triggered a liquidity crisis with investors shunning commercial paper, a major source of funding for non-banking finance companies (NBFCs). 

With buyers of commercial papers turning cautious, there were concerns that NBFCs, especially those engaged in housing finance, would find it difficult to roll over their debt obligations. November was believed to be particularly challenging with Rs 1.03 trillion of NBFC debt (excluding that of entities like Nabard, NHB and LIC) set to mature. But no major defaults happened as entities were able to roll over their obligations though at higher yields.  

In the midst of all this, differences between the RBI and the central government came out in the public domain. The two were at loggerheads over the central bank’s February 12, 2018 circular on non-performing loans, its prompt corrective action (PCA) framework that the government argued had restricted credit flow to micro-small and medium enterprises (MSMEs), as well as the liquidity issues plaguing NBFCs in the aftermath of the IL&FS crisis. There were also strong differences of opinion over the adequate level of the central bank’s reserves and how much dividend should be transferred by RBI to the government. In the midst of this, Urjit Patel, tendered his resignation as RBI governor.  

And while the RBI held its ground pushing defaulting companies through the resolution process, progress on cases admitted in NCLT were slow to come by with resolution plans for only 79 companies being approved at the end of December 2018. The only silver lining being that gross non-performing loans of public sector banks appear to have peaked in 2018. 

With some banks placed under the RBI’s PCA framework showing some signs of improvement, analysts expect some of them to be taken out of the PCA framework in 2019-20. This will help boost credit growth as these banks will no longer be hamstrung by the PCA's lending restrictions. Bank NPAs are also likely to come down further as the resolution process under IBC gathers pace.