Financing the recovery: Are banks in a position to partner India Inc?

Reforms in India started with the financial crisis of 1991. The country is in the midst of another. Shrinking government revenues means that there is only a little to go around to recapitalise state-run banks. A clear estimate of how much is needed will be evident only after the central bank’s forbearance measures in the wake of the pandemic are withdrawn. This holds true for private banks as well, though they are relatively better off, having raised close to Rs 60,000 crore in recent times.

Various macro indicators suggest an economic recovery. So the question is: Are banks in a position to partner India Inc going ahead? In his foreword to the Financial Stability Report (FSR) of December 2020, Reserve Bank of India Governor Shaktikanta Das noted: “As growth impulses take root, the private sector capex cycle should revive as existing capacities get utilised and new capacities are added. This will require the financial system to intermediate expanded growth requirements of Indian business.”

The FSR projects a sharp increase in banks’ gross non-performing assets by September 2021. Then there is the disconnect between certain segments of financial markets and the real economy. Stretched valuations of financial assets pose risks to financial stability in an interconnected financial system. The irony is that on the day the FSR was released the Sensex hit 49,000 points.

Many have called for fast-tracking the Bank Holding Company model. Of course, it calls for simultaneous governance changes as well — a tweak in capital structure in itself does not lead to better valuations. The larger setting is as follows: The withdrawal of both regulatory forbearance and liquidity support measures is around the corner. It will not be smooth sailing; all hands on the deck have to chip in.

In this background, our cover story (Banking Reset 2.0) gives a snapshot of the tectonic changes that are underway in Indian banking. Don’t miss the excerpts from the four round tables attended by some of the country’s leading bankers, non-banking finance companies, small finance banks and fintech heads.

The Banking Annual is also about celebrating success. A five-member distinguished jury headed by former RBI Deputy Governor S S Mundra selected Federal Bank MD & CEO Shyam Srinivasan as the Business Standard Banker of the Year. Happy reading!