Dear Shareholders and Stakeholders
1. Over the past financial year a slew of developments have defined the domestic andglobal financial landscape. Undoubtedly the major developments which caught attention ata global level were 1) the U.S. Presidential elections and 2) the Brexit vote which hasthe potential to alter the contours of financial and diplomatic relations between the U.Kand European Union. U.S economy posted impressive growth during the last quarter of 2016with a GDP growth of more than 3% which however nosedived to 0.7% on an annualized basisduring January-March 2017. However unemployment rate declined to 4.5% and prompted a 25bps rate hike by the U.S. Federal Reserve. EU meanwhile is nudging along with growth ashade into positive territory while Japan continues to be in deflation zone. China isexpected to grow between 6.5-7%. Most central banks are still pursuing an expansionistmonetary policy with the exception of U.S which has indicated its willingness for furtherrate hikes.
2. On the domestic front India is expected to post a growth rate of more than 7% thusretaining the tag of the fastest growing economy in the world. Macroeconomic parametersare on a sound footing: FDI inflows are at a record $43 billion Current Account Deficitis just a shade below 1.5% and fiscal deficit is contained at 3.5% of GDP with the FiscalResponsibility and Budget Management Act (FRBM) also in place for both the Centre and thestates. CPI inflation is below 3% and may even reach 2% due to sliding oil prices. Therevamped base year has shown industrial production growth at 2.7% higher than previousyears; Forex reserves are at a record $ 370 billion enough for almost a year of importcover. Rankings under ease of doing business' and competitiveness indices arecontinuously showing an improvement over the previous years to name a few. A bigchallenge is on the job creation front with employment generation growing at 1% on ayearly basis. A Fund of Fund (FoF) for startups has been created to form anentrepreneurial climate.
3. Being an integral part of the economy banking sector has been given a major thrust.To start with it has to be admitted that the scenario is a bit challenging. Bank creditgrowth continues to be anaemic with growth being 8% year-on-year for the year ended March2017. Credit to industries has been particularly hit hard. This is despite the fact thatMCLRs of banks have come down by around 100 bps over the past year. Idle industrialcapacity due to sluggish demand and banks being hit by asset quality woes are the majorreasons for this trend. Major sectors like steel power and textiles are yet to gaintraction while telecom segment has emerged as a new source of risk. Demonetization inducedliquidity surge has helped lower both lending and deposit rates and lowered bond yieldsthus facilitating windfall gains to bank treasuries.
Gross NPAs in the system has touched Rs.7 Lakh Crores with the bulk of them beingaccounted for by PSBs. GOI has budgeted Rs.10000 Cr to support ailing banks but given thescenario it seems more capital infusion would be required to salvage these banks.
4. A major game changer during the just concluded financial is the shift towardsdigital transformation that has enveloped the economy and banking landscape. Thiscoincided with the demonetization drive. The objective is to bring the cashlesstransactions to around 10% within a decade. A number of steps towards this end have beeninitiated such as waiver of MDR charges no cash payments above Rs.2 Lakh bar on electionfunding of more than Rs.2000 in cash issuance of electoral bonds etc to name a few.Banking sector would surely feel the impact of such changes with more and more customersexpected to switch to electronic banking channels significantly reducing the footfalls inbranches over a period of time. Payments banks and small finance banks ae already there tograb market share post the digital drive.
In this scenario incumbents must strive hard and innovate to stay competitive andprotect their turf.
5. The 5/25 scheme the SDR scheme and the S4A initiatives are certain noveldevelopments during the past couple of years. Though the success of these instruments inreducing the asset quality issues have been limited it has nevertheless equipped bankswith more tools to fight delinquency post the commencement of AQR exercise. However GOIhas brought forth the NPA Ordinance to complement efforts to reduce asset qualitytroubles. Moreover steps have also been taken to reduce time to implement JLF decisionsby stipulating the necessity of approval by only 60% of creditors by value as opposed tothe earlier 75%. The Insolvency and Bankruptcy Code is becoming operational fast and anOversight Committee has also been formed at the regulatory level to aid fearlessresolution of stressed assets by bankers
6. Two major issues which have somehow escaped attention of successive governments butwhich merits a look are the state of human resources in banks and professionalization ofBoards and management. Banking is an evergreen area which operates under a dynamicenvironment.
Compensating bankers properly should be a major focus area which needs to be addressedespecially at senior levels. Another challenge is replacement of experiencedsuperannuating personnel. Banks must also be permitted to introduce new products. Abeginning has however been made in this regard by permitting banks to introduce interestrate options.
7. However amidst all these challenges it is indeed commendable that banks in Indiahave been able to perform a fine balancing act between their social obligations andstaying competitive. It is noteworthy that no bank has posted operational loss during FY2017. We have successfully weathered two major financial crises as well which howevergripped seemingly infallible economies. The present challenges are only of a cyclicalnature and we are expected to emerge unscathed from this scenario as well sooner thanlater.