The Indian banking system is in the middle of a perfect storm with stagnant credit growth, surging deposits, and growing stressed assets even as it grapples with rapid digital banking adoption as well as a changing regulatory environment, a new report released by McKinsey & Company said.

The report, ‘Mastering new realities: A blueprint to transform Indian banking’, highlights the challenges as well as the technological trends driving the growth of new opportunities.

Renny Thomas, Senior Partner, McKinsey & Co, and leader of the firm’s financial services practice, said that the stressed assets of the Indian banking sector are currently greater than its networth, with the potential of putting the entire equity base of banks at risk.

Stressed assets had crossed ₹10 lakh crore in December 2016 but provisioning against these levels is only ₹3 lakh crore, he said.

He argued that the industry structure as it exists today is sub-optimal with far too many public sector banks in existence and made the case for more mergers.

However, one has to move beyond consolidation in order to attract capital and talent into State-owned banks on a sustainable basis, he said.

Calling for a structural overhaul, a systemic intervention to resolve the issue of non-performing assets (NPAs) and spur innovation and transformation, Renny said this could lead to the overall credit volume moving up by more than 120 per cent from current levels over the next five years in a favourable scenario, compared to a contraction if status quo is maintained.

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