When reports began circulating early last month that Reserve Bank of India (RBI) governor Raghuram Rajan might be about to step down, concerns about his departure led both the rupee (INR) and bonds to fall. When he actually did announce on June 18 that he would not seek a second term of office once his three-year tenure expires in September, worries grew even stronger.
While Ragan clearly has his critics, especially domestically, he has been credited with reducing inflation, since it peaked at over 11% in November 2013, slowing the rupee’s decline and starting to reform India’s state banks. “This is a negative surprise for India,” Mizuho Bank economist Tirthankar Patnaik told Bloomberg. “In India’s impending macro scenario, Rajan’s presence would have been really, really important. Without him, things are likely to be much more difficult.”
The challenges in India
It might seem that the situation in India compares well against other emerging economies. After all, India’s gross domestic product (GDP) growth rate last year of 7.3% was higher than other major countries, and India had been atop business optimism rankings in previous Grant Thornton International Business Reports. Dig a little deeper, though, and the situation is not quite so rosy.
To begin with, there is scepticism about the growth numbers following India’s revision last year of its methods for estimating GDP. Official numbers stayed brisk in 2015 even as exports and other indicators disappointed, leading some to question the data’s accuracy. It led Credit Suisse economist Neelkanth Mishra to comment to the Wall Street Journal that GDP in India is “much more than in other economies, an estimate than a measurement.”
India also slipped to the third in Grant Thornton’s most recent report due to factors that included delays in goods and service tax (GST) reforms, disagreements over payment of back taxes by multinationals, and bad loans that may well require recapitalisation of public sector banks.
Moreover, GDP growth may be under stress. While new data from RBI points to small and medium sized enterprises (SMEs) as the new engines of growth, as Professor Tulsi Jayakumar, economic and programme head of Mumbai’s SP Jain Institute of Management and Research (SPJIMR) wrote recently, small business growth has flattened over the past few years.
A key problem, as HDFC Bank country head of business banking Aseem Dhru told Indian financial portal Moneycontrol, is that larger companies aren’t getting paid on time by their customers; in turn creating problems for smaller firms. “We are seeing working capital cycle slow down,” he said, reaffirming a recent report by the bank showing that delayed payments to SMEs are squeezing liquidity throughout the supply chain.
Distressed assets at banks only exacerbate the problems. Experts estimate that India’s banks hold about US$120bn in bad loans, about 11.5% of their total assets, and combined losses of US$2.3bn in the first quarter of 2016 at 10 of the state-owned banks indicates that stress is continuing.
While reforms of regulations and the bureaucracy following prime minister Narendra Modi’s election in 2014 were supposed to be a catalyst for overcoming many of these impediments to growth, The Economist recently observed that Modi’s “ill-focused initiatives have run up against India’s statist bureaucracy.”
While measures such as a new bankruptcy law and improvements in foreign direct investment (FDI) have won approval, Mr Modi’s team has “shown limited appetite for overhauling” the economic machinery. “Pessimists see Mr Rajan’s departure as evidence of a further wilting of ambition,” opined the magazine.
Catalysts for growth
The concern is that while national reforms may have been slow, Rajan had been doing his part to initiate measures to support economic growth. He called for Indian states to improve their cash management flows and explore innovative debt instruments, as GTNews reported last month, and he also supported creation of a monetary policy committee as well as improvements in fiscal discipline. Concerned about banks’ hidden bad debt, Rajan had even started an audit of their nonperforming loans in a move to improve disclosures.
Rajan’s impending departure may have made continued high levels of growth more uncertain, and the choice of his successor is crucial for keeping growth on track.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.