Banking reforms need to get a lot more ambitious for the economy’s sake
Subscribe to enjoy similar stories. The 19 amendments to banking laws that were passed by the Lok Sabha on Tuesday remove various niggles in extant provisions, straighten out some others and make life easier for bank customers, especially a tweak that allows four nominees per account. Under the present system of a single nominee, couples tend to nominate each other; should they both pass away together, say, in a road accident, their heirs would have a tough time accessing their inheritance.
Instituting multiple nominees would significantly reduce the number of orphan accounts and the monies held in them. While these changes are welcome, they do not address India’s principal challenge of banking. Bank credit to the commercial sector in India has hovered around 50% of GDP.
This is far below the figure for most developed countries and also China, where bank loans exceed the economy’s annual output. The only rich country where bank credit is a low proportion of GDP, like India, is the US. But then, America has a well-developed debt market that lets companies borrow from individual investors and saving pools, regardless of whether lending them money is deemed safe or very risky.
Rated highly or as ‘junk,’ bonds issued by businesses tend to find takers in the US. A 2022 report by the Lok Sabha Standing Committee on Finance put the unmet credit demand by micro, small and medium enterprises (MSMEs) at ₹25 trillion or 47% of their borrowing needs. While more than 90% of India’s nearly 60 million MSMEs are micro sized and best served by specialized non-bank finance companies (NBFCs) that have the wherewithal for this task—which involves high processing costs loaded onto small loans—our banks must play their role, too, by lending
. Read more on livemint.com
