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While an uptick in economic activity will help banks come out of some of their problems, some issues currently facing the Indian banking industry are of its own doing and it needs to take the blame for the same, Citibank's India chief Pramit Jhaveri said.
The banks also need to understand that a tougher regulatory environment is "the new normal" and those who are better prepared for this new regime will outperform those that are ill prepared, Jhaveri said.
The comments come at a time when banks in India, mostly public sector lenders, have been grappling with problems related to bad loans in a big way, in addition to other issues emanating from legal and regulatory disputes and weakness in macroeconomic conditions.
"The fortunes of the banking industry will always be inexorably linked to underlying economic activity. Quite clearly, some of these problems have arisen for the banking industry because of a slow down in the underlying economic activity.
"In addition, certain extraneous and unexpected factors have also contributed to rising non performing assets. However, there is no escaping the fact that some imprudent lending or excessive indebtedness has also contributed to these rising bad loans, for which our industry must accept blame," Jhaveri told PTI in an interview.
Jhaveri, CEO of Citi India, said that the fortunes of the banking industry will be a derivative of the economic growth and activity going forward.
"Therefore, if the current optimism translates into higher growth, as is almost unanimously believed, as we have seen in the past, the banking industry will be a beneficiary. This will also allow the industry, to grow itself out of some of these problems with the passage of time.
"However, for that to happen and for banks to be able to fuel this higher level of economic growth, which almost appears inevitable, banks will have to be much better capitalised," he added.
"Given that majority of the industry is government-owned, this I believe is a decision which will have to be taken sooner rather than later. Our private sector banks have repeatedly demonstrated that they can raise capital when necessary, so this is really an issue for the public sector," he added.
The gross non-performing assets (GNPAs) of public sector banks jumped by 39 per cent to Rs 2.16 lakh crore (Rs 2.16 trillion) at the end of March 2014 from Rs 1.55 lakh crore (Rs 1.55 trillion) in the previous fiscal.
In case of private banks, the gross NPA rose 13.76 per cent to Rs 22,744 crore (Rs 227.44 billion) as compared to Rs 19,992 crore (Rs 199.92 billion) at the end of March 2013.
During 2013-14, public sector banks recovered Rs 33,486 crore (Rs 334.86 billion) against the written-off amount of Rs 34,620 crore (Rs 346.20 billion).
When asked whether tougher norms are order of the day, Citi India CEO said that it is reality that the regulatory environment has changed for the banking industry for all time to come.
"I would call it the new normal. Several additional challenges for example Basel III are also rapidly hurtling towards us. We need to very quickly start adjusting to this new world.
"That being said, there is no question of the opportunities that remain for all of us in countries like India. And that would clearly suggest that those that are better prepared for this new regime, will be in a position to participate in the upside disproportionately and outperform those that are ill prepared," he added.
Talking about the current macroeconomic scenario, Jhaveri said, "In the last six months, since the new government has been in place, there has been an extraordinary sense of optimism. This optimism is visible both in India and across the world.
"Globally, all our relevant stakeholders appear to share this view and they include investors in debt and equity, strategic investors, rating agencies and NRIs among others.
"This is also manifested in debt and equity flows and increased FDI and private equity interest. If we pause to contemplate whether this optimism is justified, most people would argue it is.
"Having said that, I personally believe it is probably wrong or premature to sit in judgment of our Government’s performance at this point. If you think about the challenges and the opportunities that this country has, it is unrealistic to expect tangible results in such a short period of time," he added.
Jhaveri also asserted that the government appears to have been "incredibly active and has already taken several important actions and steps which justify the feel good factor".
"This level of activity combined with some important decisions clearly leads people to believe that there is more to follow," he said, while adding that Finance Minister Arun Jaitley during a Citibank investor conference last week was quite specific in terms of certain actions that the Government is likely to take over the next few months.