 "BS BFSI Summit: Specialised banks needed for niche mkts, says M Nagaraju")
India’s banking, financial services, and insurance (BFSI) sector is at an inflection point with a sharp rise in its size, profitability, and balance-sheet strength in recent years. The recent macroeconomic uncertainty and volatility in the global economy have thrown a new challenge to the thriving BFSI ecosystem. M Nagaraju, secretary, Department of Financial Services, Ministry of Finance, in a fireside chat with A K Bhattacharya, talks of the challenges and the opportunities that lie ahead of the sector.
How is India’s financial sector faring in a world that is facing uncertainties amid emerging challenges such as de-dollarisation?
The sector is now the biggest and strongest ever in the country’s history. Public-sector banks (PSBs) made their highest ever profits last year and their dividend payout to shareholders was also at a record high (and this includes the scheduled commercial banks). The financial strength of the BFSI sector also shows in the provision coverage ratio, which is more than 94 per cent compared to 48-49 per cent in 2014-15.
The financial and operational turnaround of PSBs has been the highlight of the sector in recent years and they (PSBs) are now setting benchmarks for the BFSI segment. The government has taken a number of measures, legislative and procedural, and this is showing results.
Gross non-performing assets (NPAs) of PSBs have dropped to just 2.2 per cent (of their assets) from being in double digits just a few years ago. Similarly, their net NPAs declined to about 0.52 per cent (of their assets), one of the lowest ever.
How do you view the recent performance of the Indian economy?
The economy continues to do well despite rising global macroeconomic uncertainties. We are among the brightest spots in the global economy with gross domestic product (GDP) growing at a steady pace of 6.5-6.6 per cent. Our external front remains strong without any significant outflow of capital from the country.
The private sector has played a pivotal role in the growing resilience of the economy. Its balance sheet is at its strongest ever. Individuals may own companies but ultimately it is the success of the country.
There won’t be much of an impact of global financial volatility on the Indian economy. We maintain a stable and consistent policy environment.
What do you see as the key challenges the Indian banking sector faces now?
We have to ensure that strength and stability do not lead to complacency on due diligence and credit underwriting. We have to preserve the institutions we have built, and then try to expand it (their strength). That’s the first fundamental principle. Then we should try to enhance lending to the core sectors, especially to agriculture, and micro, small and medium enterprises (MSMEs). A couple of private banks have done well in lending more to MSMEs. PSBs started lending to MSME in the past couple of years but they need to enhance it further.
The second challenge is increasing the disbursement of education loans. Students should be encouraged to take loans so that they become financially responsible and pay back quickly. The next biggest priority for banks should be public grievances. Both customers who are coming to bank branches and those who access bank service online have to be treated with dignity and respect, and they must get the service they deserve. There has been a change in the profile of customers visiting bank branches. Banks should strive to provide world-class service to all.
Lastly there is the issue of cyber security. Banks have to invest a substantial amount of thinking, knowledge, and resources to ward off cyber attacks within and outside the country.
There is a perception that the pace of consolidation in PSBs has slowed after rapid rounds of consolidation. Is the government having second thoughts on consolidation?
The consolidation we did in 2020 has been successful and all the objectives except one have been met. The government remains alive to this and we continue to receive suggestions and new ideas on a new round of consolidation in PSBs. As and when the government finalises the decision to further consolidate, Business Standard will be the first to know.
Why do you think we are not seeing more banks?
The goal for a Viksit Bharat by 2047 with a per capita income of $18,000 to $20,000 will require more banks — large banks, mid-size banks, and smaller banks — servicing the diverse credit needs of the economy. The ratio of bank credit to the size of the non-financial sector in India is one of the lowest in the world. It is significantly lower than the ratio in China, Japan, and other advanced economies. We require specialised banks to meet the niche requirements of different segments of population.
What is the government’s view on streamlining PSB management?
The excellent financial performance of PSBs is a result of the streamlined selection process of managers. Their top leaders are selected on merit, based on their performance in the past. I don’t think any of the chief executive officers, managing directors, or chairmen can say that we decide for them. We have an external agency, which gives us the assessment of the candidates. And based on that, the committee — the Financial Services Institutions Bureau — selects professionals based on their excellence and record.
Why do you think the insurance sector remains underpenetrated?
There are structural bottlenecks in this. It was somehow tackled by the government by providing the PM Suraksha Bima Yojana and PM Jeevan Jyoti Bima Yojana. Insurance companies have been focused on cities since the beginning. Additionally, our social structure in villages and semi-urban areas has been that in old age parents are taken care of by children. They never thought that they would be without the safety net required. Penetration in urban areas is happening but it is still not there in rural areas. To increase penetration further, the insurance industry will require additional capital. We have not been able to put in additional capital in public-sector insurance companies, which are still dominant players. We are trying to keep our companies solvent and profitable. Last year all public-sector insurers made profit but they still have a lot of accumulated losses from the past.
Some procedural and legal reforms are required. The government is now contemplating that. Rationalisation in goods and services tax has been a great impetus for the insurance industry. It has led to an increase in premiums for most of them. A large number of people are buying insurance, thanks to the tax cut.
How has been the discussion with financial regulators?
We work together. Now, regulations and policymaking are intertwined. We require consultation. On items on which we, the government side, form policies, such as matters that may not concern regulation, we still consult them. It is because they have a lot of experience in regulation. We take their thoughts on whether an idea or policy is good to pursue. They provide inputs. As long as we have respect for their independence and functioning, I think it (understanding) should be strong.