Jaitley has more ammo left for banking reforms

If you thought that the recent note ban was by itself too harsh for the banking system, then think again.

The upcoming Budget could see the Modi-led Government administer more structural reforms to the public sector banking system.

Normal banking operations of public sector banks — who are left with no option but to abide by the Government’s diktat — have come to grinding halt that everyone in the bank — from Chairman and Managing Director to the last man standing (clerk) is only focused on demon-related activities.

Last two months have been spent focused on currency management that recovery of non-performing loans have been left hanging loose.

Don’t be surprised if all the public sector banks this fiscal (March 2017) end up reporting net losses, said a banking industry insider.

Last fiscal, 14 of the 19 PSBs reported losses. As many as 16 PSBs including biggies like Bank of Baroda, Punjab National Bank and Canara Bank skipped paying dividends.

Clearly, the deflationary impact of demonetisation has been aggravated by the banking industry’s core focus on coping with note ban issues.

It is in this backdrop that Finance Minister Arun Jaitley will present his Budget, tackling certain tricky issues on capital infusion and adoption of internationally recognised accounting standards by banks. The Indian Banks’ Association (IBA) has been pitching for postponement of implementation of Ind AS (spare a thought on how PSB balance sheets will turn if they were to adopt fair value accounting and change the basis for recognition of NPAs — Tsunami like impact?).

The joker in the pack is whether the Government would go in for a banking transaction tax while abolishing income tax.

That would straight away expand the universe of those contributing to nation building. The important point is the banking transaction tax should come in the place of income tax and both cannot co-exist.

It remains to be seen if Jaitley has the appetite for such a bold initiative, especially after the demonetisation exercise.

If there is one thing that the markets and the Mint Street are counting on, it is that Jaitley would promise more capital to PSBs (it remains to be seen given the dire situation as to whether finance ministry will differentiate between performing ones and non-performers).

It is now almost certain that more good money (read taxpayers’ money) would be allocated to the PSB system, although their capital utilisation efficiency is a big question mark.

There is high possibility that Jaitley might take forward the reform agenda of setting up an investment holding company (as suggested by Nayak committee) in which equity holding in public sector banks would be parked.

CH Venkatachalam, General Secretary, All India Bank Employees’ Association (AIBEA), said they (Government) have indicated that more capital will be infused. “It however may not be adequate”.

Terming demonetisation as a “failure”, Venkatachalam said that nothing tangible has happened in terms of tackling the menace of black money or removing corruption. “I am not biased. Nothing has happened and nothing will happen (benefits of demonetisation). It is only harassment of poor people”.

They (government) were betting that a significant portion of the high value ₹500 and ₹1,000 notes —say ₹5 lakh crore being black money-- would not come back to banking system.

But now it looks as if they have been caught offguard with almost the entire value of demonetised notes returning to banking system, he said.