Prime Minister Narendra Modi will hold discussions with public sector banks (PSBs) and financial institutions to draw up an action plan for banking reforms in "a top-level, two-day retreat for banks and financial institutions" branded "Gyan Sangam" in Pune on January 2-3. Finance Minister Arun Jaitley, Reserve Bank of India (RBI) Governor Raghuram Rajan, the minister of state for finance, Jayant Sinha, and top officials of the finance ministry, including Finance Secretary Rajiv Mehrishi and Financial Services Secretary Hasmukh Adhia, will be there, too.
Mr Modi is scheduled to interact with bankers on the second day of the retreat, "in an attempt to achieve a broad consensus on what has gone wrong and what should be done, both by banks as well as by the government, to improve and consolidate the position of PSBs". He will be given "the outline of a reform action plan ... and further deliberations will take place in his presence", according to the finance ministry.
Unfortunately, the Gyan Sangam may degenerate into pious statements and platitudes if some hard questions are not asked before the blueprint is made. Here are the questions that immediately come to my mind:
1. Is it true that the spread between average deposit rates and average lending rates in India is one of the highest in the world, making banking a highly profitable business?
2. If this is so, how come commercial organisations like the PSBs, which should thrive on such a massive spread, make losses or rather low profits?
3. How many times over the past 20 years has the government injected capital into banks, by diverting taxpayers' money?
4. If banking is a profitable business, why do the PSBs need such repeated bailouts - politely called "capital infusion"?
5. Did the finance ministry impose any performance conditions before such repeated capital infusions? If not, why not? If we did impose conditions, were they met? If not, was anyone held accountable?
6. What is the average ratio of bad loans to advances of the five largest private sector banks? The answer: 1.5 per cent.
7. What is the average ratio of bad loans to advances of the five largest public sector banks? The answer: five per cent.
8. So why are the bad loans three times more in public sector banks?
9. The RBI governor has said that India needs better bankruptcy laws. Even if this were true, how important is it for improving the efficiency of the PSBs?
10. Why is it that the operations of private sector banks are not badly hampered because of weak existing bankruptcy laws?
11. Of the cases pending with the debt recovery tribunals, or DRTs, what percentage belong to the PSBs?
12. Why do the number of cases referred by the PSBs to the DRTs far exceed those of private sector banks, even accounting for the much larger advances figure of the PSBs?
13. Bankers are supposed to be cautious people. Indeed small businessmen tell me that it is very difficult to borrow from banks, without offering collateral and personal guarantees that are several times the amount of the loan. Banks also reportedly arm-twist businessmen to buy life insurance if they want a loan. Is this true?
14. If bankers have done their due diligence correctly and acquired collateral and guarantees that are far in excess of the loan, why is it so difficult to recover money when the loan goes bad?
15. If the loans have gone bad on such a large scale, is it correct to conclude that banks, by and large, have not done the basic job of lending correctly by taking adequate and enforceable collateral? How many bankers have been held accountable for this?
16. If banking in the PSBs is so fundamentally flawed, what is the way to permanently correct it?
17. If the government continues to control these banks, how can we reward bankers who do an exceptional job and hold accountable those who don't?
18. The RBI gets scores of reports from banks every month and quarter, does regular inspections, and nominates directors to bank boards. Despite this, the PSBs are in a mess. What has the RBI done with the reports it makes banks submit? Have its inspections turned up nothing suspicious about such huge bad loans? Why not? What role have the RBI-nominated directors played even as banks were lending recklessly? Who in the RBI is responsible and accountable for all this? If no one is accountable, how can we make the RBI primarily accountable and act like a banking regulator?
If Mr Modi puts these questions to the chiefs of PSBs and the RBI governor, a lot of things will fall in place quickly. It is unlikely that Mr Modi will ask any of these, or the 20 other questions I have. If my reading is right, he wants to look ahead, not get bogged down by the past. After all, his election campaign may have painted the Congress as looters and thieves - but once in office, he hasn't done much to book anyone.
But I am afraid he will not make much headway in reforming the financial sector if he does not send some tough signals. The PSBs need equity capital infusion of Rs 2.4 lakh crore by 2018 to meet Basel-III norms. The top 30 bad loans account for Rs 87,368 crore - that is, 35.9 per cent of the total gross non-performing assets of PSBs. Behind such colossal numbers lie the problems of government ownership leading to corruption, meddling politicians, crony capitalism, regulatory failure and repeated "recapitalisation". If tough questions are not asked, the Gyan Sangam will tinker at the edges and preserve the status quo while the heart of the Indian economy - the government-owned banking system - will continue to beat weakly.