Only a major confidence boost can bring credit growth

Babu Sivaprakasam, the head of the banking practice at Indian corporate law firm Economic Laws Practice, explains the challenges the industry is facing.

What impact did demonetisation have on the banking sector when the two highest value banknotes were banned from circulation in 2016? The banking industry has experienced the effects of demonetisation. The government has had to regularly capitalise public sector banks and there has been an upswing of digitisation in the financial sector. And what about the impact on cash flows? Demonetisation attempted to eradicate the parallel cash economy. However, lack of diligent monitoring mechanisms have led to cash transactions growing yet again – to the extent that banks are unable to provide enough currency notes in their ATMs. It is important for Reserve Bank of India and the government to provide adequate disincentives for carrying out cash transactions.

What needs to happen to ease the troubles in the banking sector and India’s economy? A major confidence boost is required for the banks to ensure a credit uptake and revival. The first quarter of this financial year will see the resolution of major accounts under the insolvency regime. The legal tussle in many stressed accounts shows that all is not lost and there is serious interest in many assets, which will help in recapitalisation of the banks and to establish faith in the process.

How can confidence be restored within banks to encourage them to lend? Bankers today should be given the confidence that they are well within their right to take tough decisions, and such decisions will not come under CBI (Central Bureau of Investigation) scrutiny. This, however, does not mean that they [bankers] should act at their absolute discretion.

What can further improve banking operations? The regulators and government should look to train and provide further guidelines to bankers. Additionally, it is imperative that the highest standard of care is taken by bankers

while evaluating fresh lending proposals. RBI should consider further details in credit evaluation processes and to issue further guidelines to ensure that the financial institutions don’t provide credit in risky or unclear situations.

What else should banks be focusing on?

On the effects of digitisation, financial institutions need to concentrate on the infrastructure, technology and security measures to be taken to keep up to the demand and also ensure protection of data.