Banks cautioned on overseas plans

Financial Sector Secretary NS Sisodia today said banks with global aspirations would have to consider the downside of regulatory aspects when they foray abroad.

He added that the losses of Indian banks from foreign operations had gone up from $153 million on March 31, 2001, to $182 million at the end of the previous financial year.

Speaking at the Bankers' Conference (Bancon) 2004, Sisodia also suggested that the government should improve on its ownership role by demanding a better return on assets, strengthening the functioning of bank boards and making the management more accountable. This would ensure that public ownership satisfied both social objectives and competitive compulsions.

In the long run, competitive pressures would only intensify and Indian banking would be able to best realise its global aspirations, Sisodia said.

Agriculture, small and medium enterprises, infrastructure and regional and interpersonal differences in income, all offer tremendous scope and opportunity for innovation and productivity growth, he added.

Planning Commission Deputy Chairman Montek Singh Ahluwalia, in his valedictory address at the meet, said the government was likely to put in place a legal system to enforce creditor rights. This would provide a boost to commercial lending, he said.

"Once there is a legal environment where creditors' rights can be enforced, more competition in commercial lending will follow. This is necessary to help the economy move from 6 per cent growth to 8 per cent growth," he said.

He added that as rural areas would continue to require traditional banking services for quite some time, while urban industrial areas would switch to newer service requirements, there was a case for strengthening cooperatives to handle the requirements in rural areas.

Another challenge faced by the banking sector was the nature of ownership, Montek said.

The present recruitment and promotion practices in public sector banks were not in line with those required to become internationally competitive. The government, as the largest owner, would have to take steps to ensure that these change, he said.

He also made a case for a board-appointed management, with the government, as majority shareholder, being answerable to Parliament. This would be difficult to implement and legal issues would be involved, but it was a move in the right direction, he added.

The private sector model would not work for government-owned banks. A new model would have to be developed to enable the sector to become internationally competitive, Ahluwalia said.

He also pointed out that subjecting banks to the vigilance machinery in place for government servants was not compatible with developing an internationally competitive model.