Banking to finance India’s growth

The banking sector needs the next generation of reforms to enable it to finance India’s aspiration of 9-10% GDP growth on a sustainable basis.

The Indian economy has performed relatively well in 2015 despite the global economy being mired in volatility. Most of the country’s macroeconomic indicators have outperformed this year, with GDP growth, at nearly 7.5%, standing out amongst peers. India definitely deserves the praise of being a “bright spot in an otherwise gloomy global economy.” As we look ahead at the year, the time is right to seize the opportunity and ensure the economy continues to perform well.

A stronger cyclical pick-up in public and private investment, and a broader revival in consumption demand should be able to more than offset any external headwinds in 2016. Growth this year will also benefit from a lagged impact of structural policy reforms undertaken over the 2014-15 period.

The big question will be whether the government needs to dilute the pace of fiscal consolidation envisaged given the additional payouts recommended by the 7th Central Pay Commission? The commitment to lowering fiscal deficit is critical, but not at the cost of spurring investments or growth.

Eventually, it will be important for the Union Budget arithmetic to rely on a realistic disinvestment target, subsidy outgoes and tax collections, all of which will be encouraging from the investor’s perspective.

The year 2015 was exceptional as the pace of decline in global commodity prices was unusually steep. Further, despite less-than-normal monsoon rains, domestic food prices remained in check owing to several proactive and remedial government actions, such as open market sales, restrained hikes in MSP, importing of pulses, among others. This munificence is, however, unlikely to continue into 2016. While oil prices may remain subdued, the incremental decline and thereby the pace of further disinflation will be limited.

In addition, higher disposable incomes owing to the 7th Pay Commission dispensations will also add to demand-side inflationary pressures. Keeping these forces in mind, improving supply-side reforms in agriculture on a priority basis will be critical to enable the Reserve Bank of India (RBI) to meet its 4% inflation target by the end of FY18. On the basis of the continued improvement in macros along with higher quality of fiscal spending in 2016, RBI should have an opportunity to ease rates by at least 75 bps in the first half of 2016.

Even as the overall domestic macro situation improved in 2015, the banking sector continued to face challenges due to lack of any meaningful recovery in asset quality, growth-oriented capital constraints and sluggish profitability. Nevertheless, 2016 will be the inflexion year for the banking and finance sectors, with support from the policy and regulatory environment, as improvement in macros starts to manifest in balance sheets of corporates. Revitalising public sector banks (PSBs) has been a key focus area for the policy-makers in 2015.

The government has approved the setting up of the Monetary Policy Committee (MPC) which will have representation from both RBI and the finance ministry. This year, RBI is expected to usher in a revised framework for calculating bank lending rates based on marginal rather than the average cost of funds. This will not only enhance transmission and transparency, but it will also help result in better Asset Liability Management (ALM) outcomes and generate a lending curve for the banking system.

RBI has been systematically reducing its tolerance for regulatory forbearance. While strict guidelines on NPA recognition are in place, RBI and the government have been taking micro measures to alleviate sectoral stress.

While micro measures will help, the banking and finance sector also needs the next generation of reforms to enable it to finance India’s aspiration of 9-10% GDP growth on a sustainable basis. Economic clairvoyance will triumph political myopia in 2016 and GST will see the light of the day.

Lastly, the advent of the Jan-Dhan-Aadhaar-Mobile (JAM) trinity is a silent revolution that will transform the country in the coming years. While the Pradhan Mantri Jan-Dhan Yojana (PMJDY) will further the objective of financial inclusion, the Aadhaar platform will furnish the much-needed basic digital intelligence and mobile phones will leverage this through innovative payment system like the Immediate Payment Service (IMPS). As the JAM mobilises further mass in 2016, the market for e-finance will provide one of the biggest opportunities for the banking and financial system.