In his Interim Budget Speech in February, 2019, acting Finance Minister Piyush Goyal had stated that ‘India would be a Ten Trillion Dollar Economy by 2030’. He said that the priority of the government will be to build next-generation infrastructure, both physical as well as social, for a 10 trillion dollar economy and to provide `ease of living’.
The concept is visionary, challenging and transformative. It is an aspirational statement. Given that India’s current GDP is USD 2.7 trillion, reaching USD 10 trillion by 2030, implies aCAGR ( Compound Annual Growth Rate ) of 11% + over the next 11 years. Difficult, but not impossible. Hence the sobriquet “2020-30 : India’s Decade of Reckoning “
To help you understand the role of regulation in evolution of a robust and safe banking sector, Mr S.Sridhar, currently the Chairman of the IMC BFSI Committee sheds light on imperative aspects.
Importance of financial regulation in India and how it affect growth of the nation
Sridhar: This is a universal given. In India financial regulation has played a key role in development, directly by laying out the road map for the regulated entities and indirectly by responsive regulation – responsive to legitimate concerns of stakeholders. Some examples of the former – are priority sector concept and guidelines; payment infrastructure digital banking. Some examples of the latter are regulatory for bearance extended to banks in regard to stressed assets for the last 2 decades almost provisioning requirements, interest reference rate changes.
Emerging issues and policy responses by the Indian banking system
Sridhar: The most important issues facing the regulator are resolution of stressed assets and ensuring liquidity crunch for NBFCs. HFCs do not lead to solvency crisis that can affect financial stability. In case of the former, the regulator efforts have been supported by good implementation of IBC and less external interference in respect to corporates. RBI appears to be on top of the liquidity situation although not indulging the NBFCs through pressuring the banks on transmission of policy rate cuts, encouraging banks to securitise bankable assets of the NBFCs. Other emerging issues are Cyber Security particularly in an age of exploding digital payments and other banking services upgrading the underwriting capability of banks transitioning to a technology based supervision to render more effective and timely supervision.
Regulatory stability and the role of supervision and governance
Sridhar: Regulation, governance and supervision constitute the triad on which financial ecosystem can be developed particularly in economy with strong need for growth. The three legs of the triad constitute free flowing feedback loop that can reinforce one another.
How the Indian banking sector is rebooting to surge ahead
Sridhar: i. Through adequate capital to meet growth demands – RBI’s capital adequacy are slightly more stringent than Basel. Whilst PSBs will be recapitalised by GoI (who have committed) private sector levels are raising capital thru QIPs tier II bond issuance etc.
ii. More thrust on digital banking, use of aggregators etc.
iii. Upgrading organisational skills in key areas – risk management,
treasures, credit underwriting.
iv. Thrust on CASA in particular and on liability management in general.
v. Revolution stressed asset resolution thru various roots – IBC, Shasakt, sale to ARCs, debt restructuring accompanied by conservative loan loss provisioning.
vi. Exercising greater control over costs so that cos income ratio is reduced progressively.
vii. Right sizing the organisation.
Why 2020 – 2030 is India’s decade of reckoning
Sridhar: If we have to achieve Ten Trillion Dollar economy by 2030 i.e. a growth with CAGR of 11% plus or slightly lower, it has to be achieved in this decade. Otherwise there is a danger of falling into the middle income trap. Also, globally there are several issues currently that impinge on India’s growth aspirations.
i. China as a treat – The BRI project its cultivation of neighbours, its dumping
of industrial products and semi finished goods etc.
ii. Trade war between US – China. Could be an opportunity for India as a
threat depending upon the way we handle it.
iii. Oil price upward movement. Some estimates indicate a price of USD 80
per barrel by year end.
iv. The need to revive investment which has fallen in recent years as well as
productivity to create jobs and growth.
Mr S.Sridhar is a banker for over four decades working in State Bank of India, Export Import Bank of India, National Housing Bank( NHB) and Central Bank of India( CBOI) . He is currently an Independent Director on the Boards of a number of companies. He consults in India and abroad on strategy, export finance, housing finance, and infrastructure finance.