The profitability of banks in India has been under stress in recent years due to a combination of structural, economic, and operational challenges. Below are the primary reasons contributing to the financial struggles of many Indian banks:
- High Non-Performing Assets (NPAs):
- What are NPAs? These are loans or advances where the borrower has stopped making interest or principal payments for a specified period (typically 90 days).
- Why high NPAs?
- Poor credit appraisal processes in the past led to excessive lending to risky or unviable projects.
- Economic slowdown and industry-specific issues (e.g., infrastructure, steel, power) caused defaults.
- Delays in project execution, often due to regulatory and policy hurdles.
- Weak Governance and Management:
- Public Sector Banks (PSBs), which dominate the Indian banking sector, have historically faced challenges such as:
- Political interference in lending decisions.
- Inefficient management and lack of accountability.
- Limited autonomy compared to private sector counterparts.
- Frauds and Scams:
- High-profile frauds and scams (e.g., the Nirav Modi-PNB scam) have significantly eroded bank profitability.
- Weak internal controls and inadequate fraud detection mechanisms have exacerbated the problem.
- Capital Constraints:
- Many banks, especially PSBs, struggle with inadequate capital to meet regulatory requirements (e.g., Basel III norms).
- The government has to recapitalize PSBs regularly, which is a fiscal burden.
- Economic Slowdown:
- Reduced economic activity impacts the repayment capacity of borrowers.
- COVID-19 worsened the situation by causing widespread job losses and business closures, leading to further defaults.
- Rising Operational Costs:
- Inefficient operations and outdated technology in PSBs increase costs.
- Maintaining physical branches in rural and semi-urban areas adds to the burden.
- Stiff Competition:
- Private sector banks and non-banking financial companies (NBFCs) have been more agile in adopting technology and customer-centric approaches, capturing a larger share of profitable customers.
- Stringent Regulatory Requirements:
- Banks are required to maintain a minimum percentage of funds in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). This reduces their ability to lend profitably.
- Resolution Delays:
- The Insolvency and Bankruptcy Code (IBC) has helped resolve some bad loans, but delays in the resolution process often reduce recovery value.
Steps Being Taken to Address the Issue:
- Bank Consolidation: The government merged several PSBs to improve efficiency and reduce duplication of resources.
- Strengthening IBC: The insolvency framework is being refined to ensure quicker and better resolution of bad loans.
- Digital Transformation: Banks are increasingly adopting technology to improve customer service and reduce operational costs.
- Recapitalization: The government has infused significant funds into PSBs to meet capital requirements.
- Fraud Monitoring: Improved mechanisms for detecting and preventing fraud are being implemented.
While structural reforms and better governance are gradually helping improve the situation, Indian banks, especially PSBs, still face significant challenges that require sustained efforts to address.
By Pankaj Bansal
