The GlobalANALYST, November 2014: Banking Reforms: M G Warrier
The Global
Analyst, November 2014
BANKING SPECIAL
BANKING SPECIAL
Banking Sector Reforms*
Quest for a
Holistic Approach
Certain observations made in the
recent past by RBI Governor Dr Raghuram Rajan infuses some confidence even in
the minds of analysts and economists, who, for valid reasons, fear that
the cobweb of bureaucratic interference
and political maneuvering will delay or stop midway any meaningful efforts at
reforms. According to media reports,
addressing a select gathering of prominent and influential Indian-American
businessmen from the finance and investment banking sector at an event
organised by the Consulate General in collaboration with the India-America Chamber
of Commerce during the second week of October 2014,. underscoring the need for
financial sector reforms, Dr Raghuram Rajan stressed that “The time to deliver
begins now. We need to focus on deliverables” adding that there is political
will to undertake reforms and improve India’s economic growth.
Perhaps, the Indian financial sector was
fortunate during the pre-reform days to get adequate attention from government.
From the setting up of Reserve bank of India in 1935 to establishment of
Regional Rural Banks during 1980’s, institution-building and regulatory reforms
to support savings and meeting credit needs has been an ongoing process. During
the second half of last century, GOI and RBI had a holistic approach to
development of institutions in the financial sector.
As regards the reform-focus on commercial banks,
bank nationalisation was a major measure which brought back the social
responsibility aspect of banking which is a business dependent entirely on
public deposits. The Narasimham Committee
laid the foundation for the reformation of the Indian banking sector. Constituted in 1991, the Committee
submitted two reports, in1992 and 1998, which laid significant thrust on
enhancing the efficiency and viability of
the banking sector. The opening up of the economy has brought to surface,
the lack of competitiveness vis-Ã -vis global standards, low technological level
in operations, over staffing, high NPAs and low levels of motivation in domestic
commercial banks in general and public sector banks in particular. The recent initiatives in banking sector reforms
aim at providing the necessary platform
for the Indian banks to operate on the basis of operational flexibility and functional autonomy, thereby
enhancing efficiency, productivity and profitability.
The reforms also
include increase in the number of banks due to the entry of
new private and foreign banks, increase in the transparency of the banks’ balance
sheets through the introduction of prudential norms and increase in the role of
the market forces due to the deregulated interest rates. These have significantly affected the operational environment
of the Indian banking sector.
But, the fact
that India has been a country of lost opportunities makes one add a word
of caution, even in the best of
circumstances. The pressure on ministries to show quick results, the problems
faced by incumbents in various positions who are new to their present
assignments due to various constraints make application of mind difficult. In
the process, softer options like ‘rebottling’ of old ‘solutions’ or retaining
status quo resurface. The mindset that retained AADHAAR, the hurry in
implementing FSLRC(Financial Sector Legislative Reforms Commission)
recommendations, the hurried financial inclusion drive forcing public sector
banks to shut their eyes to normal precautions they would have taken while
opening new accounts or promising credit limits and so on could be traced back
to this phenomenon.
Indian financial
sector needs an inclusive approach to reforms. In July 2013, present RBI Deputy
Governor(then Executive Director) R Gandhi, in a speech recalled the objective
‘supporting financial inclusion’ which was included as one of the objectives
for allowing new banks when the discussion paper on the subject was released
almost three years earlier. He observed that ‘Financial inclusion has to be a
precondition for such banks…’ Gandhi also said in the same context that ‘Post
independence, we had a resolution to give attention to poverty alleviation. Our
economic planning had poverty alleviation as a key plank…Still, these forty-odd
years (sic), efforts have not made serious dent. This indicates the enormous
challenges that lie ahead for us in achieving financial inclusion…’
A recent CRISIL
study conducted on the basis of three parameters -- branch, deposit and credit
penetration -- across the 632 districts in India showed the bottom 50 districts
had just three banks per 100,000 of population, just half of the 7.6 bank
branches on an all-India level. These districts had just two per cent
of the total bank branches in the country. Besides, they also had just 4,068
loan accounts per 100,000 of population as compared to an all-India level of
11,680 accounts.
Lack of awareness, low incomes, poverty and illiteracy were among the key factors identified which lead to a low demand for financial services and, consequently, to exclusion.
Lack of awareness, low incomes, poverty and illiteracy were among the key factors identified which lead to a low demand for financial services and, consequently, to exclusion.
Recent years
have seen RBI, after a gap of almost two decades, taking aggressive interest in
improving banking outreach by propagating the slogan of ‘Financial Inclusion’.
But, the branch expansion had lost priority in the anxiety to reduce costs and
save on regular staff by allowing Banking Correspondents etc.
At this stage,
RBI, through the existing mechanism of State Level and District Level Bankers
Committees, revisit the process of identifying potential centres for opening ‘brick and mortar’ bank branches in semi-urban and rural areas and publish the list to give an opportunity to existing banks to open branches. The prospective new banks should also be asked to select centres from the list simultaneously with their plan to open urban branches.
Committees, revisit the process of identifying potential centres for opening ‘brick and mortar’ bank branches in semi-urban and rural areas and publish the list to give an opportunity to existing banks to open branches. The prospective new banks should also be asked to select centres from the list simultaneously with their plan to open urban branches.
On September 30,
2014, Finance Ministry has appointed some Task Forces for working out the
modalities for implementation of certain recommendations of the Financial
Sector Legislative Reforms Commission including the controversial ones like
setting up of Public Debt Management Agency (transfer of public debt management
responsibility from RBI) and setting up of Financial Sector Appellate Tribunal(Super
Regulator above RBI) on which RBI Governor Dr Rajan had expressed dissent.
The expectation
of the babus could be that the one
year term and possible further extensions that may be given to the Task Forces
may see Dr Rajan at the fag end of his present term and his voice may become
feeble by that time. One is aware that a High Level Committee on which RBI
Governor is member has asked the concerned division of the Finance Ministry to
examine the FSLRC recommendations. But by any yardstick, appointment of these
Task Forces to come back with appropriate architecture to implement the
recommendations is a conscious leap, similar to implementation of NPS during
the first half of last decade.
But the speed
should not blind vision or overtake priorities. The pressure being put on banks
and the banking regulator makes one think on these lines. During his recent
visit to US, in one of the speeches,
prime Minister Narendra Modi had mentioned that India has no ‘home-grown’
terrorism. Meaning, terrorism has migrated to India from outside. Remembered
this in the context of reform strategies applied across sectors in India since
early 1990’s. We will not stray away from financial sector. We do not need
organ transplantations of sorts in India’s financial sector which include
banks. What we need is not surgical approach, but the preserving and curing
physician’s approach to the existing institutional structure. From Reserve Bank
of India to the village level primary agricultural credit society, India has
a live and working institutional
structure. In the name of reforms, attempts are being made to destroy existing
structures and rebuilding new ones borrowing ‘models’ from geographical areas
which have nothing much in common with India in terms of development needs,
history or resources.
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*Submitted version of the article. The published
version include some data charts and the contents have been slightly edited.
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