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The Indian banking system has seen a wave of reforms in recent years which have been closely supplemented by various major economic reforms. BE’s Kuntala Sarkar spoke to Tushar Pandey, Independent Consultant and 

Advisor (Social Equity and PPP) and former Senior President (Public and Social Policy) of YES BANK.

Q) Is the banking sector in India improving?

A) Overall, there has been an improvement in the situation. As such, the Indian banking sector has been under progressive reforms for the last few decades. Spurt in Non-Performing Assets (NPAs) over the last 10-15 years has specifically led many public and private sector banks to look at specific solutions to address the issue of NPAs and many such measures have been taken in the last few years. This must be seen in conjunction with the recent reforms in taxation and other economic reforms which have further led to improvement in the banking sector. Some challenges do remain and they will need continuous reforms to mitigate them.

Q) What are the specific problems faced by the private banks in India?

A) The entire banking industry is facing a market revolution of sorts. For example, technology is slowly gaining inroads and is increasingly being used to provide relationship management which was earlier done by bank officials. Many banking functions are now being performed by technology companies. In fact, the line dividing banks and technology companies is blurring. This is a huge shift from the traditional banking system. This is a problem as well as an opportunity for both public and private sector banks.

Q) What are your specific policy suggestions to induce growth of the Indian banking sector?

A) Fundamentally, banks have largely been viewed from a credit provision perspective by policy makers with more focus given to socially relevant sectors like agriculture and rural development. Care needs to be taken to ensure that policy and credit delivery remains clearly demarcated for risks. The government needs to bear those risks which are required for specific domains of society but credit risk related to that cannot be borne on the balance sheets of banks. For example, some of the grant related assistance can be given in form of viability gap assistance for rural development. Similarly, with expansion of digital banking, incentives need to be channelised for consumers to use these digital channels and avoid cash handling. Many grants and subsidies can be linked with usage and not with capital expenditure and usage can be monitored via banking channels with contingent credit directly delivered to user accounts. This is possible in many sectors. The role of banks today encompasses much more than only providing soft credit for priority sectors. Bankers need to be more actively associated with policy makers and strategic think tanks and assist the government to take social equity based public private partnerships (PPP) projects.

Q) What is your view regarding the performance and growth of Indian private banks in the last two financial years?

A) We must acknowledge the fact that performance of our banking system is directly linked to the performance of our economy. The last two years have seen substantial taxation, economic and technological reforms being undertaken by government and the banking sector has responded positively to these changes.

Q) What do you think about the NPA problem? Is the RBI trying its best to control the damage?

A) It is good to see that the problem is now being recognised and tackled upfront. We should have full confidence in the ability of RBI and all the member banks to be able to address this and take remedial measures. Many such measures are already underway.

Q) Does the current Cash Reserve Ratio (CRR) need to be reduced to ensure growth of the Indian banking sector?

A) Let’s look at this question from a different angle. We need to encourage direct banking channels including digital banking and aim to remove or reduce cash handlings. The demonetisation exercise was the initiation point and its efficacy has been observed. Many new accounts have been opened and many direct digital purse systems have been introduced. However, emphasis should be given to expand this digital infrastructure to effectively bring down cash requirements. This is the direction that has been envisioned by our government and therefore, the CRR in India should progressively be reduced.