Financial Services Secretary M Nagaraju has urged Indian banks to significantly increase lending and explore all possible ways to raise capital to support the nation’s ambitious economic growth.
Boosting India’s Economic Engine
To meet India’s demanding growth requirements, banks must step up their lending efforts. The economy needs a sustained boost in credit flows, particularly for crucial sectors like Micro, Small, and Medium Enterprises (MSMEs).
Currently, credit offtake is growing at 9.5% annually, which is slightly behind deposit growth of 10.1%. While large corporations are often cash-rich, the focus for credit expansion is now largely directed towards supporting MSMEs.
Relaxing Capital Raising Rules
Nagaraju indicated that the government is open to providing policy support, including potential relaxations in Foreign Direct Investment (FDI) rules for the banking sector. This move aims to help Indian banks attract more “patient capital” from abroad.
Currently, private banks have an FDI cap of 74%, while public sector banks (PSBs) are limited to 20%. Additionally, a single entity can’t hold more than 15% in any Indian bank without special exemption from the Reserve Bank of India (RBI).
Lower-cost foreign capital could enable banks to expand credit more aggressively. The goal is to review these limits to allow banks greater flexibility in raising funds.
Diverse Funding Avenues
Banks are encouraged to look beyond traditional methods for capital. This includes exploring conventional equity markets, issuing Basel III-compliant AT1 bonds, and tier 2 instruments.
Newer avenues like tapping global financial hubs, issuing green bonds, utilizing sustainability-linked loans, and accessing foreign debt markets are also on the table. Alongside raising capital, banks are urged to focus on capital conservation by using technology to reduce operational costs.
This push comes as some state-run banks, like SBI, have already started raising significant capital. SBI recently secured Rs 25,000 crore, and other PSBs are set to raise an additional Rs 20,000 crore this financial year.
A Vision for Global Banking Powerhouses
India aims to become a $30-trillion economy by 2047, and banks are expected to play a pivotal role. For this to happen, bank credit to the private non-financial sector needs to surge from its current 56% of GDP to around 130%.
Nagaraju highlighted the need for India to have multiple globally competitive large banks, similar to those in China or the US. Currently, only two Indian banks, SBI and HDFC, rank among the top 100 global banks by total assets.
Beyond Lending: Efficiency and Inclusion
Beyond capital and lending, banks are also encouraged to reimagine deposit mobilization and boost their leverage and productivity. Strengthening digital and data capabilities, and building future-readiness in terms of ESG (Environmental, Social, and Governance) resilience and robust governance are also key.
Previous mergers among Public Sector Banks have shown positive results, and further consolidation might be considered where synergies exist. Ultimately, banks are vital in promoting inclusive growth by bringing unbanked populations into the formal financial system through government schemes like Jan Dhan Yojana.
- Banks need to increase lending to meet economic growth targets, especially for MSMEs.
- FDI rules in banking may be relaxed to allow more foreign “patient capital.”
- Banks should explore diverse funding avenues, including global markets and innovative financial instruments.
- The goal is to foster multiple globally competitive Indian banks to support India’s $30T economy vision.
- Digital transformation, ESG, and financial inclusion are crucial for the banking sector’s future.
These strategic initiatives aim to transform Indian banks into stronger institutions, capable of driving the nation’s economic aspirations.
