Dear Shareholders and Stakeholders,
1. Over the past financial year, a slew of developments have defined the domestic and global financial landscape. Undoubtedly, the major developments which caught attention at a global level were 1) the U.S. Presidential elections and 2) the Brexit vote which has the potential to alter the contours of financial and diplomatic relations between the U.K and European Union. U.S economy posted impressive growth during the last quarter of 2016, with a GDP growth of more than 3% which, however, nosedived to 0.7% on an annualized basis during January-March 2017. However, unemployment rate declined to 4.5% and prompted a 25 bps rate hike by the U.S. Federal Reserve. EU meanwhile, is nudging along with growth a shade into positive territory while Japan continues to be in deflation zone. China is expected to grow between 6.5-7%. Most central banks are still pursuing an expansionist monetary policy with the exception of U.S which has indicated its willingness for further rate hikes.
2. On the domestic front, India is expected to post a growth rate of more than 7%, thus retaining the tag of the fastest growing economy in the world. Macroeconomic parameters are on a sound footing: FDI inflows are at a record $43 billion, Current Account Deficit is just a shade below 1.5% and fiscal deficit is contained at 3.5% of GDP with the Fiscal Responsibility and Budget Management Act (FRBM) also in place for both the Centre and the states. CPI inflation is below 3% and may even reach 2% due to sliding oil prices. The revamped base year has shown industrial production growth at 2.7%, higher than previous years; Forex reserves are at a record $ 370 billion, enough for almost a year of import cover. Rankings under ‘ease of doing business’ and competitiveness indices are continuously showing an improvement over the previous years, to name a few. A big challenge is on the job creation front with employment generation growing at 1% on a yearly basis. A Fund of Fund (FoF) for startups has been created to form an entrepreneurial climate.
3. Being an integral part of the economy, banking sector has been given a major thrust. To start with, it has to be admitted that the scenario is a bit challenging. Bank credit growth continues to be anaemic with growth being 8% year-on-year for the year ended March 2017. Credit to industries has been particularly hit hard. This is despite the fact that MCLRs of banks have come down by around 100 bps over the past year. Idle industrial capacity due to sluggish demand and banks being hit by asset quality woes are the major reasons for this trend. Major sectors like steel, power and textiles are yet to gain traction while telecom segment has emerged as a new source of risk. Demonetization induced liquidity surge has helped lower both lending and deposit rates and lowered bond yields thus facilitating windfall gains to bank treasuries. Gross NPAs in the system has touched Rs.7 Lakh Crores with the bulk of them being accounted for by PSBs. GOI has budgeted Rs.10,000 Cr to support ailing banks but given the scenario, it seems more capital infusion would be required to salvage these banks.
4. A major game changer during the just concluded financial is the shift towards digital transformation that has enveloped the economy and banking landscape. This coincided with the demonetization drive. The objective is to bring the cashless transactions to around 10% within a decade. A number of steps towards this end have been initiated such as waiver of MDR charges, no cash payments above Rs.2 Lakh, bar on election funding of more than Rs.2000 in cash, issuance of electoral bonds etc to name a few. Banking sector would surely feel the impact of such changes with more and more customers expected to switch to electronic banking channels, significantly reducing the footfalls in branches over a period of time. Payments banks and small finance banks ae already there to grab market share post the digital drive. In this scenario, incumbents must strive hard and innovate to stay competitive and protect their turf.
5. The 5/25 scheme, the SDR scheme and the S4A initiatives are certain novel developments during the past couple of years. Though the success of these instruments in reducing the asset quality issues have been limited, it has nevertheless equipped banks with more tools to fight delinquency post the commencement of AQR exercise. However, GOI has brought forth the NPA Ordinance to complement efforts to reduce asset quality troubles. Moreover, steps have also been taken to reduce time to implement JLF decisions by stipulating the necessity of approval by only 60% of creditors by value as opposed to the earlier 75%. The Insolvency and Bankruptcy Code is becoming operational fast and an Oversight Committee has also been formed at the regulatory level to aid fearless resolution of stressed assets by bankers
6. Two major issues which have somehow escaped attention of successive governments but which merits a look are the state of human resources in banks and professionalization of Boards and management. Banking is an evergreen area which operates under a dynamic environment. Compensating bankers properly should be a major focus area which needs to be addressed, especially at senior levels. Another challenge is replacement of experienced superannuating personnel. Banks must also be permitted to introduce new products. A beginning has, however, been made in this regard by permitting banks to introduce interest rate options.
7. However, amidst all these challenges, it is indeed commendable that banks in India have been able to perform a fine balancing act between their social obligations and staying competitive. It is noteworthy that no bank has posted operational loss during FY 2017. We have successfully weathered two major financial crises as well which, however, gripped seemingly infallible economies. The present challenges are only of a cyclical nature and we are expected to emerge unscathed from this scenario as well sooner than later.