Turning The Tide On The Growth Slowdown
By focussing on the banking and financial services sector, the government has hit the nail on the head, writes Rashesh Shah.
“Every day is a bank account, and time is our currency. No one is rich, no one is poor, we’ve got 24 hours each.” - Christopher Rice
The alacrity with which the current government has been unleashing reforms, expediting mega bank mergers and aggressively trying to tackle the slowdown across sectors reminds us of the perennial relevance of these words. With gross domestic product growth dipping to 5 percent, consumption hitting new lows every quarter, rural distress and the liquidity crunch worsening, the need to act is being felt more acutely than ever before. By focussing on the banking and financial services sector, the government has hit the nail on the head.
The banking sector has become the nerve centre of every modern economy today, far more pivotal than its historical role of keeping empires intact and countries afloat. It has always strived to protect the depositor’s money and lend to those in need of funds. But today, the health and vibrancy of a country are closely related to the soundness of the financial delivery system and its ability to spur entrepreneurship and drive innovation; in this context, the financial system - banks and non-banking finance companies and capital markets play a crucial role.
Over the last fortnight, the government announced plans to capitalise banks and provided a liquidity boost for housing finance companies; banks were permitted to buy pooled assets of sound NBFCs of up to Rs 1 lakh crore and the government agreed to cover the first loss of up to 10 percent. These measures are expected to benefit the entire financial sector including NBFCs, whose credit operations fuel key sectors of the economy.
The banking mergers, wherein the government brought down the number of public sector banks to 12 from 21, are equally significant as are the measures to allow greater autonomy in governance and management. A larger bank enjoys a lower aggregated risk profile and such mergers often fill up business gaps for the concerned banks due to divergent product profiles and unique revenue models.
The consolidation in the banking sector, along with the autonomy measures, will create higher efficiencies through better deployment of capital, higher profitability, greater credit disbursal, and focused customer service.
Autonomy to banks will help in improving risk management and governance, strengthen balance sheets and enhance valuations.
I am especially excited by recent announcements on the thrust on more co-origination agreements between banks and NBFCs. These agreements, which were first announced in September 2018, have immense potential to serve liquidity-starved MSMEs, which drive economic growth and create jobs.
Co-origination or co-lending marks a paradigm shift in the financial sector. It shares the risk and rewards between banks and NBFCs, where both collaborate and create a win-win for themselves and customers, who have easier access to credit at a specialized blended rate of interest.
Co-lending will play an important role in meeting the market demand for liquidity and ensure an ideal lending environment that democratises access to credit.
For NBFCs, it will provide an alternate, asset-light model of disbursal that also fetches a fee-based income.
Today, the lack of credit from banks and NBFCs is being acutely felt; small and medium enterprises are the worst hit, as they struggle to get credit for their various capital requirements. Edelweiss is now working with key public sector banks to make revival feasible through accessible and reasonably priced credit for this priority segment, and has entered into co-lending partnerships with the Bank of Baroda and Central Bank of India.
Both co-lending stakeholders bring different strengths to the table. NBFCs can ensure high-quality customer on-boarding through due diligence in credit assessment and state of the art technology. Banks, on the other hand, have deeper pockets and enjoy considerable experience in priority sector lending.
Over the years, NBFCs have built up huge expertise in the credit business and possess deep business links in India’s hard-to-reach markets in tier-II and tier-III cities. Through co-lending, banks can deliver loans for small businesses, exporters, housing and farmers with greater effectiveness and impact.
At the same time, co-lending will automatically bring down risk aversion among banks to lend to NBFCs and create greater understanding that if the lending pipeline stops, it will impact all sectors of the economy.
For this partnership to work, technology will play a major role in getting this done. Technology alignment will ensure that collaboration is smooth, and value is delivered to customers. Even in the recently announced PSB bank mergers, the government ensured that tech integration was a major factor.
The model for credit going forward will be that banks and NBFCs will be partners rather than competition.
The government has signalled its intention to propel India towards the $5 trillion GDP target, and if this must be met, the entire pyramid of the economy needs to be served with more vigour, and banks and NBFCs will need to play a central role. The objectives of financial inclusion and reaching the unbanked cannot be achieved without the creation of efficient and well capitalised public sector banks, and healthy NBFCs.
Rashesh Shah is Chairman and CEO, Edelweiss Group.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.