Continue Reforms in Banking Sector The Banking Sector being the backbone of the Indian Economy, banking Sector Reforms, which was initiated in 1991 in India almost alongside with economic reforms, needs a further Stimulus of sorts. In an environment when everyone is talking of withdrawal of Fiscal Stimulus, banking sector desperately needs a Stimulus package. Indian banking sector has remarkably done well, which should be viewed in the context of recent Global Financial turmoil. When even in the mighty U.S. hundreds of banks collapsed, the Indian banking stood rock solid, thanks to the inimitable policies of the RBI. However, this does not obviate the need for the Govt or RBI to nurture the sector thro' furthering reforms in the sector . Here are some of the areas where reforms need to be initiated: i) The RBI should re-think the introduction of payment of interest on S.B. Deposits by banks on a daily product basis, as this may entail huge costs for banks which may push up their cost of deposits. At a time when the industry is grappling with the problem of low CASA deposits, increase in cost of deposits will prove to be a double whammy for them. ii) RBI should clearly define the proposed 'Base Rate' for lending. Though it has defined some of the criteria that can be taken into account while fixing Base rate, these are neither clear nor comprehensive. For example, the criteria 'Unallocatable costs' which is introduced for the first time has not been defined clearly, which the RBI should do so. Also, certain crucial factors like margin for NPA Provisioning etc has not been taken into account by the RBI. Actually the 'Base Rate' may prove to be a threat to smaller Banks who predominantly depend on big ticket, sub-PLR lending. About 70% of sector's loans comprise of Sub-PLR lending. While the average sub-PLR rate is about 6-7%, the average Base Rate of most Banks are expected to be in the region of 8.5-9%, which may have an adverse effect on the growth of advances. The RBI should not upset the apple cart for the sake of reforms. iii) Banks should be given more time to implement the NPA coverage norm of 70%. At present Banks are bedevilled by ever mounting NPAs, which take a toll on their Profitability. The various NPA recovery mechanisms in place now are not very effective and are time consuming. Why not the RBI /Govt declare that non-payment of loans taken from Banks a criminal offence?. Only such drastic steps may save the sector from the NPA imbroglio. iv) There should be a rethink and re-definition of Priority Sector. The RBI/Govt may float separate Institutions to take care of the Priority sector financing, on the lines of IIFCL for Infrastructure. A separare Priority Sector Finance Corporation of India may be thought of which may free Banks from the burden of Priority Sector lending. While it is not any body's case that Banks should dissociate themselves from this sector, it should also be appreciated that this sector still continue to be a cause of concern for Banks what with their propencity to cause NPAs. v) The Govt should immediately recapitalise Banks on the lines suggested by Dr. C. Rangarajan, which involves conversion of equity of certain quasi Govt entitities like LIC etc, as Govt capital. This will increase Banks' capital base without diluting the Public Sector character of these Banks. vi) Banks should be given complete freedom in Opening Branches, based on their viability studies. While RBI may give guidelines to Banks in opening branches in Un/Under banked sectors, the ultimate choice should be left to Banks, as to where to open their branches. There is , probably , nothing wrong in such 'controlled deregulation'. The Banking sector in India has done the Country and its economy proud in the after math of recent Global economic crisis. It is the turn of the powers that be to consider further reforms as suggested above in this sector, which will certainly prove to be a jewel in the crown.
G.K.Murthy
Senior Manager (Economic Analyst)
Vijaya Bank, H.O
Bangalore-1.
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