Radical reforms, and not restructuring, holds the key to reform of the banking and financial sector as current policies may only postpone the problems and not resolve it altogether, the country's top bankers said.
At a brainstorming session during at the 47th National Management Convention of All India Management Association (AIMA), they argued that solving the problems of the real economy will automatically solve the problems of the banking and the financial sector as the clients who can't make money in their respective businesses would not help in creating a healthy banking system.
"Kicking the can down the road will not help. It (restructuring) will make the problem only worse," said Amitabh Chaudhry, Managing Director and CEO, Axis Bank, at the session.
Sharing another view, Chandra Shekhar Ghosh, Managing Director and CEO, Bandhan Bank, said that banks need internal reforms too. "They need to reach out to the unbanked as they struggle to grow with the existing customers."
Hemant Kanoria, Chairman, Srei Infrastructure Finance Ltd, felt that reforming the real sector will hold the key to improving the country's financial sector. "Do not put the cart before the horse. Before reforming the financial sector, reform the real sector first," he said.
According to Chaudhry, the functioning of the public sector banks has not changed even after consolidation or reduction in government holding, and they still have to carry the government agenda. "The final solution is that the government should not own banks. To really reform the financial sector, go the whole hog," he said.
Chaudhry warned that the government may not offer another stimulus package at all and the banks have to solve their problems themselves. The banks that have not raised capital or that cannot get refinance from other banks will struggle, he said.
Ghosh said that banking has become challenging because the depositors say that the interest rates are low and the borrowers say that the interest rates are high, and the courts have intervened in the pricing of outstanding loans. "There is a need to balance the interests of depositors, lenders and borrowers."
Credit growth is in the rural areas and big banks need to develop a different cadre for that market because MBAs are of little help there, according to Ghosh.
Kanoria argued that solving the problems of the real economy will automatically solve the problems of the banking and the financial sector. "Financial reforms without real sector reforms will lead to further NPAs," he said.
He emphasised that the liquidity of NBFCs will not improve unless infrastructure companies and MSMEs make money.
"Interest rate cuts will have no impact on credit offtake because the borrowers who need more money will not get it at low rates, especially when borrowers do not have the cash flow to pay back," said Kanoria. He argued for a commercial settlement between the borrower and the lender to clean the slate instead of relying on a regulatory prescription.
Kanoria also said that release of the Rs 8 lakh crore of infrastructure contractors that is stuck with the government holds the key. "If the government releases that money, the borrowers can pay back the bankers and bankers can lend more," he said.
Chaudhary complimented the Reserve Bank of India for imposing additional provisioning on banks for restructuring loans, but said that inclusion of start-ups in the priority sector lending category is not a good move. He said that not all banks want to lend to start-ups as they do not want to lose the principal amount..