Getting credit back into the system
As the economy turns around, it is critical that the banking sector develops in tandem, to support and finance this growth. With a conducive and stable policy environment, the banking sector will see tectonic shifts in the coming years.ht view Updated: Jul 23, 2014 23:50 IST
The Indian economy is emerging from its cyclical nadir. While the macro environment has stabilised in the last six months, signs of strong revival are still elusive. I am confident that the government’s thrust on infrastructure, as validated in the budget, will be the stepping stone to stimulate growth. As the economy turns around, it is critical that the banking sector develops in tandem, to support and finance this growth. Banks, after all, perform the crucial task of financial intermediation by pooling savings and channelising them into investments through maturity and risk transformations.
The challenges that banks face are manifold. There has been an increase in stressed and non-performing assets (NPAs), particularly among the public sector banks. Further, to support potential growth and to meet Basel III requirements, recapitalisating of public sector banks assumes priority. Having said so, it is well-known that stress in the banking sector has been caused particularly by the infrastructure sector. As such, policy measures nurturing a revival in this sector will be crucial. Reviving large-scale infra projects, which have inherent economic viability but are facing temporary cash-flow mismatches, can take place if such assets can be taken over through a transparent bidding process by corporates or joint ventures.
Further, recognising the need for large-scale infra-financing, the government in the budget adroitly balanced announcements of infrastructure projects such as 16 new ports, ultra modern coal power plants, new airports in tier 2 cities, North-East highways, 100 smart cities along with incentives for banks to raise long-term funds for infrastructure financing (exempted from CRR/SLR requirements) with a flexible restructuring of infra loans. Such a move augments the ability of banks to take greater exposure to incremental infrastructure financing sans further deterioration in asset-liability mismatches. Following the government’s announcement, the Reserve Bank of India (RBI) has been quick to notify the new norms.
Going forward, at the micro level, the government, in consultation with the RBI, should improve access to capital for banks through a multi-level borrowing window and by allowing flexibility of borrowing through bonds and medium term notes for well-rated banks. Investment by foreign banks up to 74% can be considered an alternative to the current combined limit of 74% under FII/FDI/NRI investment.
Facilitating the availability of credit for key sectors is critical for the revival of banking and the economy overall. Priority-sector lending status to pre-shipment credit in foreign currency (PCFC) will sort out liquidity and pricing problems for exporters. Further, takeout financing for infra projects can be incentivised by allowing reasonable compensation to banks when they give up a good asset after the project is completed. Akin to infrastructure projects, a grace period of two years may be extended to non-infrastructure projects.
With an aim to channelise retail savings into the financial sector, banks may be allowed to offer the Gold Deposit Account (GDA) to defer gold imports, thereby promoting the financialisation of gold and curbing pressure on the current account deficit (CAD). The GDA will represent notional units of gold and provide gold price return in weight terms. The gold liability created with the GDA will have to be netted off at the economy-wide level with a body holding gold in the form of assets. The government and RBI could set up an apex body — The Gold Bank (GB) — which can procure and retain gold abroad through offshore foreign currency borrowing. The banks can then act as an intermediary between retail customers and the GB.
From a structural perspective, the government can make a difference by addressing the need for human capital in the public sector banking space, improve competition in the sector and enhance market value and eventually free itself from the burden of pumping in capital every year. In this context, the Nayak Committee recommendations can be implemented for improving systemic efficiency. With a conducive and stable policy environment, the banking sector will see tectonic shifts in the coming years.
Rana Kapoor is president, Assocham, and MD & CEO, YES BANK
The views expressed by the author are personal