Budget Wishlist: Financial services sector

KEY DEVELOPMENTS

• Globally, banks ought to be focusing on transforming themselves to leverage the opportunities and cope with challenges thrown up by powerful forces reshaping the banking industry, customer expectations, technological capabilities, regulations, demographics and macroeconomic shifts.
   
• There is anxiety around the changes in the business environment unleashed by new entrants such as payments banks, small finance banks, universal banks and FinTech players. While the differentiated banks will not be able to provide all services that universal banks can, superior technology and new operating models will see these banks eating into the fee income of incumbents.

KEY ISSUES

• Banks in India are hit by the triple whammy of slowest credit growth in the past two decades, several years of unresolved non-performing assets (NPAs) and a regulator that wants them to come clean on poor quality assets.
  
   
• Decline in asset quality continues to be a key area of concern, for public sector banks as well as private banks. In the third quarterly results, the total NPAs have increased significantly and almost all banks have reported a large drop in earnings or losses due to provisioning requirements.
   
• Banks, which have tried to embrace financial inclusion in line with the national and regulatory priorities, are yet to figure out how to provide cost-effective financial services.
   
• Clarity of regulation/norms around FinTech on eKYC, P2P, etc.
   
• With recent results, we will now find ourselves in a situation that requires banks to be recapitalised. Because of low equity valuations, decline in asset quality and lower private equity ratios, capital infusion might actually need to come from the government, further increasing the state's hold on the banking sector.

EXPERT VIEW: Bharti Gupta Ramola

PwC expert answers Business Standard readers' questions on what to expect from the Budget

RAM: Banks have posted significant decline in profits, or even large losses, in their latest quarterly results. The quantum of NPAs has also risen. What can Jaitley provide for the sector in the Budget to ease banks' burden?

Jaitley is already talking about giving more powers to banks and introducing a bankruptcy law to keep a check on NPAs. The following measures will also help:

• Steps to push credit demand, i.e., investment flows.
• Policy measures and administrative actions to further unlock stalled infra projects
• Judicial reforms so that contracts can be enforced.
• Structural reforms in some of the key sectors.

JAYARAMAN: Media reports highlight the failure of company management, company auditors and bank regulators for an increase in banks' NPAs, besides a lack of owners' equity to propel growth.

Increase in NPAs is due to a number of reasons, including the global downturn, stalled projects, volatility in commodity prices, banks acting as arms of the government, as well as poor governance and management of corporations. We should also recognise the no-recourse or limited-recourse nature of lending in project finance for infra and core sector projects of long gestation. In such situations, if bankruptcy and foreclosure provisions could be enforced, banks could move relatively swiftly to resolve poor-quality assets. This lack of enforcement also fuels extreme risk-taking by some promote-managed companies, supported by poor governance. We believe solutions to reduce NPAs should include the following:

• Enabling bank boards to make independent credit decisions through reduction in government holding and independence in selection of bank senior management.
• Judicial reforms to enable timely enforcement, resolution and bankruptcy.
• Better governance at the level of the regulator, banks and companies.

Bharti Gupta Ramola
Leader (financial services), PwC India

CEO BYTE: Keki M Mistry

"Expect specific provisions to push faster growth in rural economy and accelerated depreciation benefit to kickstart investments. Also, there could be a hike in allocation for the housing sector, which has a potential to spur steel and cement. Moreover, benefits for savings, investments, insurance and pension are scattered. It will help broaden the tax net"

Keki M Mistry
Vice-chairman & Chief Executive Officer, HDFC