Indian financial sector has miles to go: Chief Economic Advisor

Our Bureau New Delhi | Updated on October 29, 2020 Published on October 29, 2020

Krishnamurthy Subramanian

Banks, NBFCs must tap Covid crisis to up global game, deploy tech extensively, says Subramanian

Chief Economic Advisor Krishnamurthy Subramanian on Thursday urged the financial sector — banks and NBFCs — to take the Covid crisis as an opportunity and up its game at the global stage.

Addressing FICCI’s first NBFC Summit, Subramanian said: “It's time now for the financial sector to start saying — ‘we need to be counting in the global scheme of things’. For the fifth largest economy, we cannot be punching so much below the weight in the economy.”

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The ratio of private credit to GDP in India is about 50 per cent when the average at the OECD level is about 160 per cent, he observed. “We are one third of this average. In areas like the North-East, the credit to GDP ratio is less than 10 per cent. This simple fact should tell you how much work there is to be done,” he added.

“While we certainly deserve to pat ourselves on the back for the good work, it wouldn't be inappropriate for me to say that for the financial sector in India it is miles to go before we sleep. There is so much to be done.”

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No country has been able to grow fast without having its financial sector lead the growth, he added.

Banking top-rung

Subramanian further said that today, of the top 100 banks globally, as many as 18 are Chinese and yet the fifth largest economy, India, has just one there — SBI, at 55th rank.

This statistic, along with the fact that India is at one third of the OECD average on credit ratio, illustrates “how far we have to go”, he added.

He urged the NBFC sector to challenge the commercial banks to take financial inclusion to the bottom of the pyramid. The fact that there are problems of quality in lending is a clear pointer that the use of technology has been sub-optimal, the CEA noted.

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Use of technology

"Use of technology can be far higher in the financial sector. We are not doing enough in thinking about data, AI, machine learning. We have just scratched the surface. While use of technology has been there for retail lending, there has not been much technology use in large corporate lending,” he said.

Simple things like tracking related party transactions, data on promoters’ pledge and quality of financial statements can enable one to infer the ability and willingness to repay, said the CEA.

There is a need for NBFCs to push the envelope on these aspects, he said, adding that the financial sector has not been ambitious enough to punch its weight in the economy.

‘Zombie’ lending

Subramanian advised the boards of financial institutions to keep a careful watch on lending so that ‘zombie lending’ is not encouraged.

He also felt that banks should take advantage of the new netting law and expressed confidence that credit derivatives can now take off to manage credit risk.

Subramanian highlighted that the recent farm sector and manufacturing sector reforms will enable NBFCs in particular to lend in a large way to primary and secondary sectors of the economy. "NBFCs and the financial sector will not be able to avail this opportunity in a stable and sustained manner unless the investment in technology, data and analytics is ramped up to a different level,” he said.

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Published on October 29, 2020
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