The Indian government is not reforming its banking sector quickly enough, as troubles such as high levels of bad loans hold back economic progress, a top consultant told CNBC on Thursday.
Prime Minister Narendra Modi’s administration has done “many good things” such as implementing a goods and services tax and a new bankruptcy law, according to Srivatsan Rajan, chairman of Bain & Company India. But, he added, increasing the banks’ ability to lend is what will get the economy going again.
“If there’s one thing I would say the government does not move fast enough, is really on the reform of the banking sector — whether you call that the recapitalization of banks or just finding ways to ease the flow of money to companies,” he said on the sidelines of the World Economic Forum’s India Economic Summit in New Delhi.
“Credit growth has been very, very poor. It is one of the reasons that one should be concerned about the state of the economy. I think there are many other good things, but credit growth needs to increase for the economy to really get going again,” he added.
The banking sector has grappled with the increase of non-performing assets and rising credit costs for much of the past six years, Goldman Sachs analysts said in a note last week. As a result of those troubles, banks have not been able to grow their loan supply to spur economic activity in the country.
India’s growth slowed to a three-year low of 5.7 percent in the April-to-June period, official data showed. Many analysts blamed the goods and services tax introduction and Modi’s controversial move to ban high-value notes — known as demonetization — for the slowdown.
Rajan said the two moves would be beneficial in the long term, but the economy is taking longer than expected to adjust to those policies. Fitch Ratings on Monday trimmed its growth forecast for the year to 6.9 percent from its previous projection of 7.4 percent.
“Both [ goods and services tax] and demonetization I think are necessary steps but it’s taking longer for the structural impact, the benefits to play out than a lot of people have anticipated,” he said.