By Somindu S

For both his supporters and detractors there is one question which media harps on…..What is Modi sarkar doing? They all had hoped (supporters genuinely and detractors reluctantly) that there will be big bang reforms. But since this Govt is engrossed in doing work rather than PR in TV studios, the general perception given to us via our media is Sarkar is slow, cautious not moving and so on. Even though many far reaching steps have been taken, there is hardly any analysis on its impact barring few.

Though occasionally you do read news that India has got renewed global recognition or gasoline prices are down or Govt employees have started coming on time or that IIP is up, inflation is down, GDP is increasing….but still missing according to media missive is those so called “Big Bang Reforms” and now we are told that Modi is lucky.

Sarcasm asides let us try to take few of flagship initiatives. We will take one by one in each article.

Why 12 Crore zero balance accounts have power to reform Indian Banking System

Common people at Jan Dhan Yojna promotion stall

All of us have now heard of record account opening in India. The short time frame and humongous achievement has got this exercise registered for Guinness Book of world record. PM during one of his speech lauded this scheme as cornerstone of inclusive development. He also hinted that in future the masses could be included in more financial products like banking and insurance giving them better options of increasing income. But I am surprised neither him nor any RIGHT economists have deciphered Jan Dhan Yojana (JDY) from the different angle. Rather all the right wingers are only pressing for rate cuts so that highly leveraged private sector can get breather.

There are few occasional reports that speak about savings of Govt coffers by JDY scheme. But I look at this scheme from totally different angle.

As per the RBI reports, India has one of the highest cash to GDP ratio. Not just from the developed countries benchmark but even for emerging countries, India lag poorly to Brazil, Mexico and even Russia. If you look at banking business, “cash flow business” is the base of any banking transaction. Banks get cash from depositors and they use same cash to lend to borrowers at higher rate. The difference is their profit. Obviously more cash available to them would make them more competitive, profitable and that would be good for Indian economy that needs huge financial investment going forward. The JDY in this regards is a game changer. Even though it was supposed to be no-cash account, 12 crore account holders have deposited more than 100 Billion plus Rupees as per the current figures.

The cash economy largely prevalent in Rural India or Urban/Rural unorganised sector is oblivious to Banks. Imagine diversion of this fund via banking system. We have seen Tip of an iceberg in the form of 100 Billion. More individual savings if successfully diverted to the bank that would be big boost to cash ratios of Banks.

Still this is small. The real bonanza for banking sector is about to happen. Every year government shells out large subsidies directly to the Oil, Fertiliser and Gas companies to keep the prices low. At the peak of Oil prices, this was around 2.93 Trillion Rupees. Even with reduced oil prices, it is still close to 2 Trillion Rupees (that’s twelve Zeros after two) and 20 times more than what people deposited so far. Imagine the kind of cash moving into banking sector, freeing Govt from funding non-performing Banks, at the drop of the hat.

No AccheDin for Lazy bankers

Deepak-Parekh

The health of economy is only as good as her banking system. Indian banks are long abused by politicians. Banks are forced to give loans which would eventually be NPA. The crony capitalism only made matters worse. Banks never cared for recovery as they knew Govt will eventually bail them on demand.

If you are wondering why Deepak Parekh is upset, here is some food for thought.

Probably for the first time, Bankers, private, public or foreign are seeing active central bank asking uncomfortable question. In fact RBI is asking very simple ones. They want to know how Banks are performing on their Non-performing Asset front not just for the current but even future ones. They are asking banks to check their portfolios and asses their risk. Basically Rajan wants Banks to give away their old ways and work hard. To make life easier, in bankers meet PM made it amply clear, there will not be any pressure from his Govt side telling bankers whom to lend. This is the single most problem crippling and corrupting our banking system.

Second thing RBI is pushing for is Foreign exchange (Forex) Risk. Today India is sitting on the largest piles of foreign exchange reserve. Yet deputy Director Mr. Khan has warned private sector to be careful on Forex losses especially non-financial companies. Banks are now encouraged to educate their clients on controlling their risk. Basically this Modi Govt wants our Bank to be doing right things and be solid from within. On ground, RBI is taking stern steps to check Banks work efficiently in lending.

Message from Rajan is very clear. “Money is finite resource like water” don’t come to RBI when you run out of the water. My tap will not be open for you. I am channelling money in economy for your benefit. But make sure you improve or else you go dry. The elite bankers of India are not used to such treatment from RBI. Deepak Parekh wanted to raise funds from abroad; RBI has set priority very clear on house cleaning. Mr. Parekh’s grouse is well understood. No one has questioned these League a bankers in India so far. But then he would not have to complain if he had spent his time wisely when he heard this speech way back in June-2014.

Shedding tag of Lazy Bankers

Reforms like this are visible but very difficult to experience in short time. The rot in Indian Banking system is legacy since Indira Gandhi days. It is an acute illness. Only consistent bitter Ayurvedic medicine will work over a period of time. PM did use this analogy when he said, how you can expect sick patient to run, we need to nurse our economy before it can walk forget run. Banking system is the blood of economy if there is problem in here it can cripple whole body.

Today World is looking at us with great hope, especially when China, Brazil Russia all are showing decline. A huge volatility in global market is anticipated. Modi-Rajan team is working overnight to improve our banking system so that India does not necessarily get dragged into turmoil. Robust and vibrant banking system that works independently will be the key as India tries to claw back on growth path. You hear Arun Jaitely making comment that Indian private sector is 70% leveraged (high on debt). To ask them to put money in economy would be difficult. The investment will have to come from Government funded Infrastructure projects and for that to happen banks will have to put their house in order first.

Acche Dins are just round the corner but to get the benefit, Bankers need to shape up and shed tag of Lazy Banking.

In next article we will try to examine what goes behind “Make in India” what does Gujarat model tell us?

Sources:
–FE
–Zee News
–FT
–Live Mint

Click here to follow SominduS on twitter

© Copyright DeshGujarat. All rights reserved. Republication or redistribution of any DeshGujarat content, including by framing or similar means, is expressly prohibited without their prior written consent.