Papering over cracks in India’s banking sector

Mahesh Singhi, the founder and managing director of Singhi Advisors, a global investment banking firm based in Mumbai, talks about the woes of India’s banks.

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Mahesh Singhi, the founder and managing director of Singhi Advisors, a global investment banking company in India’s financial hub,Mumbai, talks about the woes of the banking system.

What steps are being taken to improve the industry’s situation and are these helping?

While the Reserve Bank of India (RBI) under Raghuram Rajan, who is its best hand in recent decades, has taken a slew of initiatives, none of them seem to be as effective as envisaged. The biggest is ending the regulatory forbearance for loan restructuring from this April. Another step is discouraging banks from selling bad loans to asset reconstruction companies at huge discounts since last August. The third crucial step is the introduction of the 5/25 scheme for infrastructure loans under which lenders can recast loans after every five years for 25 years, considering the huge asset exposure of the system to the sector. And fourthly the RBI has allowed banks to take over the management of a stressed company if they feel that its management has swindled the funds and then landed in trouble. But I feel that these steps will act as a mask for the stress as banks may not transparently declare stressed advances.

Do you think private sector banks are likely to grow their share of the market significantly?

The private sector banks still have miles to catch up with their state-run peers, primarily because Indian consumers still do not believe in paying a fee for banking services. Led by the market leader, State Bank of India, state-owned banks still dominate both the credit and deposits space with close to three-quarters of the overall business.

What are your views on the state of the sector?

The Indian banking sector, still dominated by state-run lenders, presents a bleak picture in the medium term with not just their deteriorating asset quality, but also the larger issue of low core capital base that has to be bolstered by March 2018 under the Basel III framework – apart from the lingering tepid credit growth for the third year in a row. What is more worrying for me is that none of the leading private sector lenders say dud loans are behind them. Instead they, too, see the issue persisting in this fiscal. They are also worried about low credit growth as the real economy still limps on crutches – despite the rosy numbers under the new GDP calculation wherein it’s projected the GDP will clip at 7.9 per cent. Despite every effort, as many as 21 trillion rupees (Dh1.2tn) worth of large manufacturing and infrastructure projects across the country still remain on paper only.

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