Future remains uncertain for India: McKinsey

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Mumbai, Nov 6: A McKinsey & Company report on Indian banking released on Thursday notes that despite the Indian credit market experiencing healthy growth in the past, the future remains uncertain.

The report, titled “Towards superior risk management in Indian banking”, highlights the fact that that credit has grown at about 29% over the past few years. This has been possible owing to variety of factors: GDP growth ranging 8-9%, increased urbanisation, and a rise in the number of affluent and mass affluent households. The growth in credit is also accompanied by a robust deposit growth rate of 21%. However, recent indicators suggest that the future will be more challenging, the report notes.

“The global financial system has been hit hard by the current crisis, with a slowdown in credit across developed markets. Though the current half-yearly numbers do not show signs of a slowdown, there are indicators of tough market conditions. The real estate sector is already facing the impact of a slowdown in GDP, consumption and investments and tightening liquidity situation. This has led to higher funding costs; NPAs have started rising over the last two years and the real estate index has shrunk 82% in 2008, compared to 50% shrinkage for the sensex,” the research team of McKinsey & Company notes in the report. Talking about priorities for Indian banks, the report says that they need to adopt “end-to-end portfolio management perspective” to the credit book, starting from segmental focus determination to post-NPL management and workouts.

The report also notes that risk awareness should be extended out of the risk unit to the mid-office, back-office, systematic risk education, training and cultural change programs for banks.

The report highlights the fact that traditional banks should balance a “judgment-based lending” philosophy with scientific score-card or model-driven approaches, particularly in retail segments. New generation banks should continue to refine their models and risk-adjusted pricing tools.