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State Bank of India (SBI) chairman Dinesh Kumar Khara on Thursday said India’s economic contraction is expected to ease significantly in the September quarter amid a revival in demand.

Addressing the virtual Hindustan Times Leadership Summit, Khara said he expects India’s gross domestic product (GDP) to contract 8-9% in the three months to September, narrowing from a 23.9% contraction in the June quarter that saw a strict nationwide lockdown aimed at containing the pandemic. The government is scheduled to release GDP data for the September quarter on Friday.

“The second quarter has seen significant improvement in the activity level. I would correlate it with the unlock situation in various towns and cities. Wherever we have seen unlock happening, we have seen demand revival," Khara said, adding that he hopes the revival will be sustained.

With several macroeconomic indicators showing signs of economic recovery gaining pace, economists expect the contraction to ease in the second quarter. Earlier this month, the Reserve Bank of India (RBI) said the economy is expected to have contracted by 8.6% in the September quarter, slower than what it had estimated initially. The central bank also forecast that the GDP would grow in the December quarter, compared with its previous expectation that growth would return in the March quarter.

In the unorganized sector, Khara expects positive activity in the rural economy, with migrant labour returning to cities. However, it may take time for normalcy to return.

In the backdrop of criticism about a RBI panel recommending banking licences for large corporates, Khara said the ownership structure of a bank doesn’t matter, if the corporate governance is tight.

“Much of it depends on corporate governance. Be it public or private (bank), the most important thing is corporate governance, related-party transactions and exposure limits. As long as these things are enforced through regulation or oversight mechanism, the banking system should not have much of an issue," he said. Over a period of time, he said, regulation has become strict, and RBI’s internal working group has recommended amending the banking legislation to ensure adequate oversight mechanism in place.

Khara also said there are not many takers for the recently announced one-time debt structuring scheme, despite banks reaching out to companies. “The reason is that people are not resorting to schemes and reliefs as the first recourse. They are trying to navigate the difficulties on their own. And when it is beyond them, they will come forward. This is what we have seen in our books. Eventually, people will not be left out with options and resort to it. And this process might go on till March 2021," he said. According to him, companies will watch for the sustainability of demand revival, which will be the guiding principle for them as far as credit is concerned.

The steps taken by the government will help investment demand pick up in the next three-six months, he said.

The corporate governance structure, as well as issues related to the conscience of the board and implementation of law would have resulted in the crisis at lenders such as YES Bank, DHFL and Lakshmi Vilas Bank, the SBI chairman added.

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