HDFC chairman Deepak Parekh says RBI's clean up should not push banks to the brink

MUMBAI: The Reserve Bank of India's drive to clean up the Indian banking system may be a welcome move, but is fraught with dangers like pushing them on the brink, said Deepak Parekh, chairman, HDFC.

Parekh said he agreed that "deep surgery" was required to solve the NPA issue in public sector banks but cautioned against over doing the bank clean up. "While I absolutely do not wish to second guess the regulators and I do not at all doubt their competence in assessment of the situation, I only wish to caution that too much of anesthesia can also result in a patient becoming comatose," Parekh said in Mumbai.

"…surely the objective of the clean-up is to fix the financial rot, not to incapacitate banks. The banking sector cannot afford another quarter like the one just gone by," Parekh referring to the quarter ended December where almost all banks reported higher NPAs following a RBI review of their books.

So far 32 of 40 listed banks have declared their results of which 10 banks’ gross NPAs have risen above 8 per cent while 22 banks have reported gross NPAs of more than 5 per cent.

Parekh said problems of PSU banks won’t be solved unless the government allows talent to come in, new investors to run banks and stops diktats on who to lend to.

The government has wiped out corruption at top levels, made auctions transparent and made great strides in financial inclusion. However, India needs to fix its infrastructure through faster regulatory approvals, less bureaucracy and increased allocations in social sectors like health and education.

He however cautioned against being consumed by too much fear and doom. "Investors have to go somewhere. Yes, they may temporarily pull out their money, but at some stage they recognise that they have to seek out avenues where they can earn better returns and they need to invest in destinations that have demand, growth potential and an ability to absorb large investments. This is clearly India," he said.

He pointed out that investment activity is happening off the markets, through private equity and investments in unlisted entities. "This is what has helped create start-ups as well. India has entrepreneurial zeal and has the third largest start-up base after the US and UK. India’s e-commerce industry is expected to be over $45 to $50 billion in the next four years. Some online ventures will work, others may not, but the demand is immense so the opportunities in this space are massive," he said.