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Banking and Insurance June 20, 2017

How To Tackle Banking Sector Woes

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The Quarter-4 of the Financial Year ending 2017 wasn’t any different. The balance sheets of public sector banks of India reflected that their non-performing assets (NPAs) had only worsened further. Although Reserve Bank of India introduced many measures, including Scheme for Sustainable Structuring of Stressed Assets (S4A), 5:25, Strategic Debt Restructuring (SDR), along with asking banks to conduct Asset Quality Review, an exercise that opened a can of worms, not much has been achieved.

Also read: Implications of the ordinance for the bank NPAs

On the other h and, the Government of India has earmarked funds to be pumped into public sector banks so as to raise their capital and align it with Basel norms. From within, however, banks do not appear to be fighting with the right strategy to resurrect.

State Bank of India (SBI) has come up with draconian transaction charges, which a private lender, HDFC, has already implemented, as a measure to surge revenue. While it was expected that banks would ease the milieu for their customers who have only recently recovered from the demonetization shock, the abrupt charge on cash withdrawals and deposits can only be called regressive.

But, if not this, how will banks, reeling under bad assets, turn things around? Let us explore another area, the sale of non-core assets, which include holdings in insurance joint ventures.

From Punjab National Bank to SBI, IDBI to Canara, multiple state-run lenders have forayed into the insurance business with an objective to supplement proceeds from banking activities or to compensate losses on account of loans turning bad. Bancassurance is the precise terminology here which denotes retailing of insurance contracts through banking institutions.

IDBI Bank lately announced its plans to sell off the stake in its insurance arm, IDBI Federal Life Insurance, in the backdrop of bank’s deteriorating financial health. As per the officials of the bank, this would help them raise some additional capital that will improve its financial position to at least some extent and prevent a looming debt default which might arise in case the bank isn’t able to service its coupon payments for Tier 1 bonds.

When assessed prudently, the entire picture appears as a short-sighted and ill-thought decision, for diversifying into insurance business was undertaken to augment the financial ratios of these lenders, now an outright reversal of this position means pumping in further resources to carry out the separation, besides losing out on the lucrative insurance market.

ICICI Bank’s arm, ICICI Prudential Life Insurance Company Ltd came out with its initial public offer last year that was subscribed with bullish attitude since the company could post h andsome profits from the insurance business. Why then think of dumping the insurance arms of public sector banks for the sake of earning some short-term capital?

How then to tackle the present banking sector mess?

Why not begin with rationalizing the number of branches and salaries and allowances of public sector bank employees? It is to be noted that while a graduate working with a restaurant chain as profitable as McDonald’s earns not more than INR 15000/ month, the same graduate can draw a salary as high as INR 70000/ month when employed with lenders like SBI or PNB.

As far as non-core assets like insurance and mutual fund services are concerned, the lenders must pump in resources to train their workforce on effectively selling these products and services to the extraordinary number of customers visiting their branches. The profit and loss statements and balance sheets of insurance behemoths such as Aviva, MetLife, and Star or for that matter of insurance subsidiaries of private sector banks are evidence that insurance business is one of the lucrative returns.

Public sector banks of India, rather than coming out with short-sighted measures, must re-work not only their banking operations but also their non-core assets. Ab andoning these non-core activities will only add to their woes. Remember, insurances do not produce NPAs, loans do.

One response to “How To Tackle Banking Sector Woes”

  1. M K Bhargava says:

    Very informative piece of article. Banks certainly need to decrease NPAs. It is because of NPAs that depositors do not get the rightful return.

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