RBI governors have to make any number of speeches and since there is a large and competent machinery to research for them, there is a steady stream of utterances which invariably score in competently capturing the conventional wisdom of the day. But governor D Subbarao’s speech at the annual bankers’ conference (BANKCON 2010) last week goes a bit further. Even though it touches on several key issues, it is not too long. This makes it meaty. But where it really scores is in its forthrightness, under the garb of restrained central banker-speak. It shows how RBI as an institution has grown. It’s got grey matter, has developed an independent habit of thought and is willing to speak its mind, undeterred by the feathers it might ruffle in the process.
The first and the least difficult issue that it addresses is how Indian banks measure up to the requirements of the new Basel-III norms and whether they will be able to meet them by the time they become operational. The answer is that they are well placed in terms of the new norms and will be able to adhere to them in time. But the challenge will be to keep adhering to them while meeting the credit needs of a growing economy and sticking to stricter norms.
This has to be juxtaposed against the pointed observation that in terms of the key operating parameter — net interest margin — which reflects the cost of intermediation, Indian banks are behind some of their peers even after making allowances for their additional obligations like priority sector lending. The speech categorically mentions “the efficiency gap between us and our peer group of countries” and points to high transaction costs, wages and salaries, and levels of provisioning. This can be bridged through productivity improvement, skill enhancement and greater use of technology.
If this is the situation, what is the basis for encouraging the large Indian banks to seriously look at overseas acquisitions to grow a few banks of global scale as the finance ministry was doing not so long ago? After an elaborate “on the one hand and on the other” argument, the speech concludes that Indian banks should consider increasing their global footprints “opportunistically” even though this will not bring them anywhere near the top of the global league. You don’t need to be a mind reader to know that RBI is not rooting for global acquisitions.
If Indian banks are well advised to hasten slowly abroad, what of global banks coming to India and in which form, branch or subsidiary? First, going by what has happened in the world in the last three years, large global institutions, which were supposed to be role models for Indian banks to emulate and modernise, have turned out to be systemic risks. Foreign banks like to operate through branches, domestic regulators have greater comfort in them turning themselves into subsidiaries, but both follow a pattern — aggressively chase market share in good times, cut bait and run in bad times. By posing the question as to whether subsidiaries should be given full national treatment because they have chosen to become subsidiaries which the regulator prefers, RBI is leaving no one in doubt as to where it stands on the crucial issue — can foreign banks be expected to play a beneficial role in taking economic development wide and deep? If the answer is a resounding no, then the issue of more branches to foreign banks gets a low priority.
Perhaps the most significant point that the speech makes is on the issue of resolving the confusion created by the banking sector being governed by “a baffling plethora of laws governing different segments of the banking industry”. Although RBI has been able to regulate all banks with the help of the Banking Regulation Act, historically there is one Act for the State Bank group, another for the nationalised banks. In particular, it draws attention to the Competition Act and Banking Regulation Act mandating different procedures when it comes to amalgamation of banks. It points to the need for empowering RBI for consolidated supervision of banks and financial conglomerates.
The speech notes with approval the finance minister’s announcement in the last Budget speech on setting up a financial sector reforms commission to rewrite and clean up the financial sector laws so that the legal framework can meet the needs of the times. The last has acquired a new significance after the world’s big banks fell down in the crisis which is just behind us. Then it makes the critical observation that a legislative commission cannot bring about changes in policy or the regulatory architecture. That has to be first debated and then decided so that the commission has a policy mandate which it can codify. Here is the key call to the finance ministry — discuss these things with us and have a public debate so that all stakeholders can refine their thoughts.
Then it invites the bankers assembled at the conference to “set the ball rolling by discussing the various aspects of legislative changes required in the banking sector”.
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These then are the key issues facing the banking sector. It will clear the exams but there is no question that it should try to improve its grades. Using mug books (bringing in foreign banks in a big way as role models) will not help. The finance ministry does not have the divine right to hand down a set of model answers. They have to be collectively thought out.