Finance and Investment Cell, SRCC interviewed Dr. Smita Kashiramka, alumnus of BITS Pilani, and Associate Professor of Finance at the Department of Management Studies, IIT Delhi wherein she shared her opinions on The Indian Financial Industry.

1. What is a ‘Bad Bank’? What is the impact of the centre setting up one now? The Government of India recently announced the setting up of a bad bank with the primary objective of managing its long-fought battle of managing non-performing assets (NPAS) in the Indian banking sector. The new structure of Bad Bank- comprising of National Asset Reconstruction Company Limited (NARCL) and Indian Debt Resolution Company Limited (IDRCL) aims to purchase the non-performing loans from the commercial banks and then sell security receipts against these purchases in the market. Through this process, the balance sheet of the banks will see an outward movement of bad loans and inflow of liquid funds that will help them in making more loans thereby tending to increase their top line and bottom line. Although the objective of this new mechanism is to reduce the burden of banks and provide liquidity to them that can be translated into productive activities via lending business, yet there are challenges that this new mechanism entails. Firstly, the success of this mechanism lies in the risk-taking appetite of the investors in India via the purchase of security receipts. Secondly, the regulators have to ensure that the creation of bad bank doesn’t propel moral hazard problems leading to more reckless lending by banks. One fundamental issue that still remains to be addressed in the context of NPA management is the appraisal of the loans at the time of sanction as eventually, whether the loss is through write-off of the bad loans (leading to recapitalization, especially in the case of public sector banks) or government guarantees, it is eventually the public money that will be lost. 2. What is sustainable accounting? Why is it becoming increasingly popular? Sustainability has come to the forefront encompassing all aspects of economic activities in a way like never before. It refers to the reporting of activities that are undertaken by firms at have are pro society, environment, and firm’s own performance at large. As business stakeholders today are interested in knowing how the firms conduct their environment, society and governance (ESG) operations and how these further influence the financial performance of the firms. Also called sustainability reporting, which used to be a voluntary activity a few years back in India, the first phase of reporting in India started with the guidelines issued by the Ministry of Corporate Affairs and thereafter more changes (through Companies Act 2013) were made. The recent initiative by the SEBI to prepare Business Responsibility and Sustainability Report by top 1000 listed companies is a step towards making sustainability reporting at par with financial reporting. This itself highlights the importance of sustainable business practices and their accounting and reporting in the Indian context specifically, and in the larger context, generally. Thus sustainability accounting is a step towards building more responsible businesses that are aware of and contribute in a manner that the impact is positive on their financial as well as societal and environmental performance aspects.

3. What are your thoughts on the increasing trend of a shift to non-banking channels from banks in the Indian financial system? Banks are the backbone of economies. When any financial system is in its nascent stages of development, the dependence of the various economic units on the banking sector is tremendous due to the absence of alternate mechanisms available in the system. However, with the increase in financial broadening and deepening, every financial system is bound to witness more players and instruments. So has been the case in the context of the Indian financial system. The continuous evolution of the financial system especially post-independence (witnessing nationalization of entities) to the liberalized setup post-1990s have brought about a gamut of financial institutions, asset classes, and services providing wider choices to the Indian investors, beyond the traditional banking services. Over the years, concerted efforts by the regulators to regulate the financial system, adopt best practices, and educate the investors have transformed the Indian financial system and escalated the pace of its growth, and that is where the non-banking channels such as equity markets, mutual funds, alternate investments, real-estate and other segments, to name a few, of the financial system have seen exponential growth. This has helped investors in building diversified portfolios, firms in having optimal capital structures via more choices, and as well as reducing the systemic risk of the entire system. 4. Which sector do you think will witness the greatest growth in the equity market in the coming future? Technology-driven firms will lead the equity space in the years to come. Technology has transformed the way firms used to work and conduct business. The emergence of fields like big data and artificial intelligence are driving the business strategy and creating new opportunities for firms to create a space for themselves amongst the user groups. In the years to come, the firms that fail to adapt themselves and recreate a sustainable market, will struggle to survive. In the recent past, the world over, the most successful unicorns have all leveraged the technology to build businesses and render solutions/ products that are scalable and can penetrate the markets fast and with precision. Infact, the businesses that fail to adapt fast to these changing environments will remain the laggards and eventually may face the risk of extinction. Next in line, would be the pharmaceutical and healthcare sector that will witness high equity growth. The unprecedented way in which the Covid-19 pandemic impacted the entire world, has revealed the vulnerability of the systems, especially from the emerging world, to such a crisis situation. There is a high likelihood of capacity expansion, innovation and development, that will fuel the growth of the pharma and healthcare sectors.

5. What are the implications in the long run of the introduction of the T+1 cycle? SEBI recently announced the introduction (in a phased manner ) of T+1 settlement cycle. Presently, the stock exchanges in India have T+2 settlement cycle, i.e., a trade that takes place of day ‘T’ , gets settled on the second working day. This new move aimed at reducing the settlement risk as well as increasing the liquidity in the market has been welcomed by some segments but at the same time, some sections have not been so keen due to operational issues and increased costs. While implementing this change, the larger perspective has been to strengthen the Indian capital market and enable it to emerge as a globally competitive marketplace. However, the effectiveness of the same will be revealed only in the time to come in terms of integration of all stakeholders (internal and external) in terms of seamless adoption of this change. Globally, most of the leading stock exchanges follow T+2 settlement cycle. The successful transition will provide immense liquidity and hence more opportunities to domestic and foreign investors, thereby expanding the size of the Indian stock market. Also, such a mechanism will help in reducing the system-wide risks and generate more confidence in the Indian markets at large.

The interview was conducted via email