Indian banking reforms not ambitious enough, says Bain India Chairman

14 November 2017 Authored

Despite the expansive economic reforms introduced by Prime Minister Modi, Bain & Company's India Chairman Srivatsan Rajan feels that the Indian banking sector, which continues to struggle with a range of issues, is holding up the economy and should become a more urgent priority for the central government.
Since coming into power in 2014, the Modi administration has not hesitated to bring about widespread economic reforms in India. Having already opened the country up to Foreign Direct Investment (FDI) in recent years, the administration recently proposed the further transition to 100% FDI in the retail sector of the country, and up to 25% within the personal goods segment of the food retail sector.
Perhaps the two largest reforms associated with the Modi regime are the demonetisation scheme and the Goods and Services Tax (GST). Enforced through a surprise legislation earlier this year, the demonetisation scheme entailed the discontinuation of the largest currency denominations, with the primary objective of cutting out of circulation billions in black money that had accumulated across the country. The move has allegedly led to a three-year low (5.7%) in India’s economic growth, but is accepted for its long-term benefits.

Srivatsan Rajan

Meanwhile, the GST represents an entirely transformational tax regime for India. Due to roll out in April 2018, the GST will act as a single, overarching tax structure that will streamline a number of local, state-level, and federal taxes. By virtue of combining the taxation structures, the regime will eliminate a world of tedious administrative burdens from business-processes across the country. The consulting industry, in particular, has benefitted from the new regime, as businesses turn to the Big Four firms among others to help restructure their internal taxation systems to meet the requirements of the new regime. Last month, KPMG, HP and Vodafone formed a consortium with the specific aim of helping companies comply with the GST.

Banking sector reforms

Chairman of Bain & Company India, Srivatsan Rajan gives credit where its due with respect to these reforms, applauding their potential benefits in the long term. However, Rajan believes that the time has now come to shift attention to boosting the economy in the short term, which he believes is possible only through quick and efficient reforms in the banking sector of the country.
India’s banking sector is currently struggling with Rs.10 trillion (Lakh crore) in cumulative non-performing assets (NPAs) on local tender books. According to recent analysis conducted at Goldman Sachs, the sector has been dealing with these NPAs and rising credit costs for the better part of six years now, which is substantially squeezing the lending capacity of banks in the country, thereby slowing down the entire economy.
Earlier this year, the National Company Law Tribunal (NCLT) got involved to begin recovering the funds with the help of leading consulting firms. However, Rajan feels like more is required on the part of the government to dig the banking sector out of its current situation. According to him, efforts to bring the lending capacity up again are critical for further development of the Indian economy.

Speaking informally at the World Economic Forum’s India Economic Summit in New Delhi, Rajan said, “If there's one thing I would say the government does not move fast enough, is really on the reform of the banking sector – whether you call that the recapitalisation of banks or just finding ways to ease the flow of money to companies.”