Indian markets have shrugged off the fears of Rexit — Raghuram Rajan’s announcement of not seeking an extension at the RBI. After expressing shock, global financial institutions are now taking that in their stride. Speaking to Bloomberg TV India , JP Morgan India CEO Kalpana Morparia says institutions are larger than any individual and India has enough talent to take the reforms forward. The bigger problem India is confronting right now is slow credit growth, which has to be revived if the economy has to grow at over 7 per cent, she said. Delving deep into the crisis over stressed assets, she said the road to fixing banks’ NPA problem is still a long one to cover.
What’s your perception of the major risks to the Indian banking sector? Will the NPA problems hinder credit growth and economic expansion?
If India wants to continue on its growth trajectory of 7 per cent plus growth, if not higher, banks have a very important role to play. Across every parameter, when you look at the banking penetration in the country, we are also lagging in some of the emerging markets; be it credit to GDP ratio or bank account penetration or insurance penetration or asset management, we are lagging in the entire financial services.
We always want to focus on some of the challenges that Indian banks face. I want to highlight some of the advantages that Indian banks have today. We can leapfrog a lot of technological advances. Computerisation was relatively late. It was only in the 1990s that we even thought about computerising banks. And, therefore, India had this great ability to leap-frog from the mainframe to the distributed architecture; ATMs, phone banking and using hand-held device as the primary tool to engage with customers or using treasury desktops as the primary tool of engaging with corporate treasurers across the length and breadth of Indian corporates.
I think they have this huge opportunity and they will go through that. Given that we have a largely bank credit-led model and don’t really have active public debt markets, banks do end up taking a significant amount of concentration risk, across conglomerates and sectors. We have all gone through difficult cycles — in the late 1990s, post the global financial crisis of 2008 and a couple of years later we saw another crisis. A lot of external factors contributed to the slowdown in terms of the projects that were in implementation.
So yes, there has to be a massive clean-up exercise and I think the regulators and the bank managers are extremely focused on it. We will have to give it time.
Indian banks have passed through difficult phases in the past and have come out more resilient. When do you think banks will come out of the down cycle and overcome the NPA problem? Do you feel we have come quite a long way?
I think we have covered some distance. There is a significant distance still to be crossed. My hypothesis here is that wherever you have hard physical assets on the ground that are backing the bank lending, you are in a much better situation than having lend against a hypothetical collateral or no collateral or taken a significant market risk.
Now, there will be degrees of what is the sustainable level of debt. Therefore, all initiatives that we have been taking in terms of addressing that core issues, I think, are all great. Creating a framework where it will be easier for people, who are under greater public scrutiny to justify their actions, is to create a facilitative platform for action. I think it will, again, help in the scenario.
So, if indeed growth picks up, as a rising tide lifts all boats, it will certainly help us as it did at the turn of the century in terms of the overall growth coming back.
Do you see any signs of nervousness over the change in the RBI Governor and a possible discontinuity in the reforms process? Or do you think the fears are unwarranted?
I think India has some great institutions. The RBI and several others have been functioning for decades now. Every Governor leaves a strong imprint in terms of their priorities of the day, and the current Governor is no exception to that. But the institution is always larger than any individual. I have great faith in our institutions. And I am sure there is ample talent out there to take forward the good work that the Governor has done.