PwC's financial services lead John Garvey on India's banking sector

Rising proportions of non-performing loans (NPLs), an increasingly pervasive credit crunch and complex restructuring processes are the primary challenges currently facing India’s banking sector. This is according to PwC’s global financial services leader John Garvey, who spoke to Fortune India.

Garvey’s comments come amid a phase of policy-driven changes in India’s banking sector. Reports emerged in 2017 that NPLs and non-performing assets (NPAs) in India had reached a value of Rs.10 trillion, sparking large-scale restructuring efforts and calls for reform among banking experts in India.

While major creditors called upon the advisory sector to support with restructuring, the government has sought greater efficiency amongst public sector banks (PSBs) by calling for the merger of ten major PSBs into four cohesive banking entities. The Reserve Bank of India, meanwhile, has done its bit by encouraging digital channels and pumping capital into the banking sector.

In light of these measures, PwC's Garvey was asked by Fortune India if the Indian banking sector has “turned the corner” from a poor situation. Garvey’s measured response is that the policy changes are indicative of a promising direction, but the sector needs time to get back on its feet.

A subdued economic outlook is not helping in this scenario, particularly against the backdrop of a credit crunch brought about by restructuring efforts. This, alongside a substantial pool of NPLs to work through and the complex process of merging major PSBs are the biggest challenges identified by Garvey. 

“Even after the recapitalisation drive by the government and the workout efforts of the banks, it will take more time to show significant improvement in the NPL ratios. India’s banking sector had a capital adequacy ratio of 14.1% and NPLs represented 9.2% of the total outstandings,” he said.

Garvey predicts that the credit crunch is likely to persist for a while. Alternative credit sources such as non-banking financial corporations (NBFCs) might be a viable option for borrowers, although NBFCs are also struggling with the banking sector’s reluctance to lend to them.

The mergers, meanwhile, will throw up a range of complexities. “Post-merger, there are concerns pertaining to synchronising the human resources (HR), information technology (IT) and business strategy of the merged banks. The synergies among the merged entities will require strong execution to be realised.” The consulting industry in India is involved in supporting this complex process.

Nevertheless, India’s vibrant digital banking scenario and budding microfinance environment offers some cause for optimism, and the collaborative efforts underway between the government, the RBI and the business environment is likely to play “a pivotal role in completing the turnaround,” according to Garvey.