In a market with large swathes of under-penetrated pockets, realising the full potential is crucially linked to correcting select policy provisions, especially those concerning independent directors.
In the monetary policy statement of Reserve Bank of India Governor Sanjay Malhotra, economists and leading bankers saw a clear message of comfort on the inflation front and a focus on stimulating growth.
In a world coping with uncertainty and chaos, spotlight on India and its economic growth seems inescapable. At the cusp of a strong and continued economic growth, India has been one of the fastest growing large economies of the world. Also, forecasts of good monsoon months ahead hold out scope now for better prospects for rural incomes.
On June 6, there was an added dose of comfort from the country’s central bank. In the monetary policy statement of Reserve Bank of India Governor Sanjay Malhotra, economists and leading bankers saw a clear message of comfort on the inflation front and a focus on stimulating growth.
Inherent strengths
That this is on top of some systemic strengths of the Indian banking sector also seem to work in India’s favour. Veteran bankers have often pointed to inherent strengths of Indian banking where bank failures have thus far been largely those resulting from managerial lapses than due to systemic failures. With rectifications put in place rather rapidly after a crisis, depositors have historically not lost out.
In an added edge for the financial sector, the country has since 2016 also been witness to a digital payments revolution. This has been aided by the interbank money transfer system or UPI (Unified Payments Interface).
It is the confluence of these factors apart from the scale, size and a young, growth-hungry demography of India that has opened up scope for untapped growth potential for financial services in India. It is perhaps with good reason that Keki Mistry, the veteran Indian banker who sits on the boards of several leading institutions, including the HDFC Bank, has often pointed out that growth prospects will never be a problem for the Indian financial sector.
Low penetration of services
To him, it is because, “the penetration of any financial service product is extremely low in India by global standards.” For example, “mortgages are at 12 per cent of GDP, total retail credit is less than 20 per cent of GDP, insurance or mutual fund penetration are all low.” With a palpable sense of optimism, he says, “In a country like India with a young population given that two-thirds of the population is below the age of 35, the scope to grow for the financial service product market is unlimited and one that can be sustained for several decades.”
But then, speak to a cross-section of practitioners in the field, and to most while there do seem opportunities galore for growth in a market with large swathes of under-penetrated pockets, realising the full potential is still crucially linked to correcting select policy provisions, especially those concerning independent directors.
Without wanting to be named, a link node running across most observers and practitioners was the need to create an environment which is conducive enough to facilitate that growth engine and at the same time have the safeguards in place to make sure that systems are not abused.
Correcting anomalies
Consider this: If a person, say ‘A’, is on the board of a bank then that bank cannot lend to any other entity on which ‘A’ is also on the board. So, if there are good and hugely respected professionals on the board of some reputed companies, who also borrow money from banks but if there is a common director on the boards then the concerned bank is not allowed to lend to this company, even if it stands tall in its financial performance and governance practices and is highly regarded by banks. This deters truly outstanding professionals from joining the boards of banks.
Attracting the best
Also, this is not only about leading organisations and market leaders. Weak companies, some analysts point out, also need best of the minds to help them build the organisations but again the law stipulates that if you are a director in a company that has defaulted in making any payment then you are debarred from taking on directorship in any other company.
This again means any good or truly outstanding professional would never want to be on the board of a weak company, which sadly needs him or her the most. The main pain point therefore is that the liabilities attached to being a director are so high that if something goes wrong in a company then an independent director is held responsible. Many seem to suggest that instead of the independent director it is much more important to hold the wholetime directors responsible. This, more so, in times when the internal auditors are also not able to identify any anomaly.
Correcting provisions such as these are apparently crucial before expecting the financial services to take-off truly in India. Which is what is making economists and policy-watchers favour a bit more broad-minded and realistic approach in the framing of the law on these and creating conditions that ensure good and competent people join company boards and offer advice on how to take the India growth story forward.
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