How can the banking system be brought back on track? Rating agency Fitch and the International Monetary Fund gave their views on this burning topic on Thursday.
While Fitch Ratings said that a consolidated Indian banking structure would be a positive development in the long term, the IMF said India must prioritise the clean-up of banks’ balance sheets and tackle the corporate debt overhang.
“Vulnerabilities in corporate financial positions and public bank asset quality pose risks to the economic recovery and to financial stability if left unaddressed,” said Jose Vinals, Financial Counsellor at the IMF, during a talk organised by the Reserve Bank of India.
NPAs with banks are at a 13-year high, constraining their ability to lend and boost economic growth. RBI Governor Raghuram Rajan had recently asked for a clean-up of the books by March 2017. The Centre is also putting money through 2019 to shore up PSBs.
The other proposal is to merge some smaller banks with the larger ones in order to have strong banks rather than a large number of banks.
Fitch observed that large banks in a consolidated banking system enjoy scale benefits leading to better diversification of risks and stronger overall profitability, contributing to higher credit ratings.
The banking system would need sufficient lending capacity as corporate India expands and extends its global reach.
“…private credit to GDP should rise from the current levels of just over 50 per cent as the middle class grows and becomes more affluent. This would imply higher credit growth rates relative to GDP over an extended period,” it said.
Meanwhile, Crisil on Thursday downgraded ratings on the debt instruments of eight banks and revised its outlook on five others to ‘negative’ from ‘stable’. The credit rating agency warned that the earnings profile of most PSBs has deteriorated with many expected to report a full-year net loss.