Next wave of financial sector growth expected from eastern region
Prospects, challenges and the road ahead
Mumbai, 19 September 2014: Government’s initiative to improve connectivity to and within the east and north eastern region, and Reserve Bank of India’s in-principle banking licenses to two private players, one of which is a microfinance company based out of eastern India and draft guideline for small and payment banks, is expected to have a significant impact on the growth outlook for the financial services sector in the region.
In its report titled Fuelling Growth: Prospects, Challenges and the Road Ahead, Deloitte in India and Confederation of Indian Industries (CII) highlight that, these initiatives are also expected to improve the lives of millions of Indians in the region by bringing them into the mainstream financial sector and freeing them from the clutches of usurious moneylenders and fraudulent chit funds.
A large portion of the population, especially in the eastern and north-eastern India, needs to be included in the financial mainstream. “To enable India to continue on the path of economic growth and fulfil its macroeconomic potential, this vast population needs to be included in the formal financial system. The next wave of growth can only be achieved if all Indians are included in the process”, said, Monish Shah, Senior Director, Deloitte in India.
“India's banking industry could become the fifth largest banking sector globally by 2020 and the third largest by 2025. In the next 5-10 years, the sector is expected to create up to two million new jobs driven by the efforts of the RBI and the Government of India to expand financial services into rural areas. Contribution from eastern and north-eastern regions of the country will be crucial for this growth” said Mr. Viresh Oberoi, Chairman, CII Eastern Region & CEO and Managing Director, mjunction services ltd.
The per capita deposit for the eastern region was INR 30,700 and that of the north-east was INR 27,300 at the end of year 2012-13. The same metrics for the western region is about four times higher at close to INR 120,000 and that of north India is about three times higher at INR 88,000. The disparity in per capita credit is even starker. At the end of 2012-13, the loan outstanding per person was only INR 15,000 for the eastern region and INR 9,000for the north-east, whereas the same was INR100,000 and INR78,000 in the western and northern regions, respectively.
A distinctive characteristic of the economy of both the regions is that these regions are dominated by a single state – West Bengal contributes to more than 45 per cent in eastern region’s economy and Assam contributes about 60 per cent to the economy of the north-east.
While these driver states have maintained their growth trajectory with West Bengal growing at 6.6 percent and Assam at 6.4 per cent between 2006-07 and 2012-13, other states such as Bihar and Jharkhand in eastern region and Tripura in north-east have seen rapid growth in the last few years, even outpacing these driver states, and raising the overall regional average growth.
The economy of these regions has been traditionally dependent on agriculture as well as metals and mining sector with large mineral deposits found in Jharkhand, Odisha and West Bengal. In addition, the economy of the north-east region also depends on tea cultivation and tourism sectors. The government has been investing heavily in infrastructural development associated with improving connectivity to various industrial belts and economic belts of the eastern and north eastern region.
“Although infrastructure development may not directly lead to enhancement in financial inclusion, it is expected to catalyze an overall economic growth of the regions and thus, encouraging the commercial banks to expand into these part”, added Monish Shah.
With economic recovery on the horizon, the demand for credit is set to witness a dramatic increase once again in the coming years and therefore, a more robust risk management on the banks front would be critical in minimizing any fresh slippages or adverse movements in asset quality without deterring the impending growth.
The relentless push from the banks in the past to expand business led to a breach in their risk management systems and subsequently, increased regulatory focus on improving such systems as well as increased compliance risk and regulation costs. “Banks need to exhibit that they have indeed learnt from their past mistakes and use a proactive approach to address issues related to asset quality. This would help in overall reduction of stressed and non-performing assets, enabling the banks to participate in the next phase of growth with a cleaner state”, said Monish Shah.
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