Manish Sabharwal in his opinion piece has jotted down criticism of the conventional approach towards financial Inclusion. Additionally, being the co-founder of Team lease services, an India-based company providing human resource facilities to a range of industries, he believes that credit financing or moratoriums would not aid a strained economy.
“A modern economy grows by lending and a modern state is a welfare state. But fiscal constraints or natural disasters often create temptations to disguise spending as lending. COVID’s pain is breeding unreasonable requests like interest waivers, endless moratorium extensions, blanket one-time restructurings, fudging accounting, reducing capital adequacy, 24-month IBC suspension, etc,” he writes.
Diet Coke approach
Similarly, providing customers with the best credit experience is not the solution. Because the “diet coke approach has been failing the system of financial inclusion for the past 50 years. Migrants, self-employed, and MSMEs (medium and small enterprises didn’t seem to reap benefits from credit financing.)
Lessons learned in the past 20years: Sabharwal
Bad debts:
According to Sabharwal, from 2008 to 2014, corporate credit grew from 18 lakh crore to 54 lakh crores. Of the total increase, Rs 12 lakh crore were bad loans.
This implies that getting the loans back is the real game. Lending loans is easier.
Breaking the thermometer doesn’t help the fever
Preventing accounting fudging along with restructuring debt would have saved Rs 7 lakh crore for the fact that banks would have been running short on capital.
Having More than Capital
More than capital is required for banks. However, their risk-weighted assets remain lower against the last two years despite having a capital infusion of Rs 2 lakh crore.
Furthermore, Manish Sabharwal talked about a five-pillar strategy for bringing in the balance between financial inclusion and stability.
Five Pillar Strategy
1. Manish Sabharwal said that many more banks are required for competition-driven credit financing.
2. The system of governance in private banks should transition to Amaanat rather than jagir.
3. In public bank sectors, government banks and companies sometimes fail to acknowledge return on equity and market capitalization in value.
4. The need for statutory auditors, ethical conduct, shareholder self-interest, and risk management are primarily highlighted in the context of RBI supervision.
5. Non-bank financial companies need better regulation, the regulatory apartheid amongst banks and non-banks must be ended.
IBA asking for a debt recast
Additionally, the Indian bank association (IBA) has recently asked the government for a debt recast on a case to case basis. The request will avoid fresh bad debts. The association has requested immunity to the provision in banking parlance. This would help them restructure loans without setting aside capital.
The reason for the unpreparedness is a repayment-schedule according to the pre-pandemic estimate. Hence, the old repayment schedule is no longer relatable to the debtor. The banks have asked for the choice to stay with the creditor. Which means the bank will determine the debt recast on a case to case basis depending upon the cash inflows.
Escaping the economic distress for real?
Moreover, the system asks for rules to change as per the economic need. However, banking practices must also be scrutinized where the policies ought to be financially inclusive. In a way that preserves the rights of both debtors and creditors.
This will prevent the economy from finding its way out of one economic distress to another.
