Reddy tells banks to get in shape

Reserve Bank of India (RBI) Governor YV Reddy today said cost reduction and recovery management were the key to making Indian banks more competitive.

"Improving recovery management in India is an area requiring expeditious and effective action in legal, institutional, and judicial processes," Reddy said in his keynote address at the two-day banking conference, Bancon 2004.

Indian banks had done a remarkable job in containing non-performing loans and recovery of bad and doubtful assets was crucial for banks to have comfortable margins, he said.

"Let me add that for 2004, the net non-performing loans ratio for Indian scheduled commercial banks at 2.9 per cent is ample testimony to the impressive efforts being made by our banking system," he said.

Reddy said technology intensity of banking was one area where India needed to do significant catching-up. "India happens to be a world leader in information technology. But its usage by our banking system is somewhat muted. It is wise for Indian banks to exploit this globally state-of-the-art expertise, domestically available, to their fullest advantage," the RBI governor said.

He added that another area to focus was sound risk management practices. "Banks can, on their part, formulate early warning indicators suited to their own requirements, business profile, and risk appetite in order to better monitor and manage risks," he added.

Commenting on the level of openness in the economy, Reddy said India had exceeded the commitment given to the World Trade Organisation (WTO) in granting branch licences to foreign banks.

He said foreign-controlled banking assets, as a proportion of total domestic banking assets, increased significantly in countries like Austria, Ireland, Spain and Germany, but there had been smaller increases in the UK, Switzerland and Asia.

"Available evidence seems to indicate some correlation between the extent of liberalisation of the capital account in emerging markets and the share of assets controlled by foreign banks. Foreign banks in India, which are present in the form of branches, seem to enjoy greater freedom in their operations, including retail banking, than domestic banks," he added.

Reddy also pointed out that the profitability of their Indian operations was considerably higher than those of banks owned by Indian shareholders.

Reddy said GDP growth in the current fiscal would also be within the 6-6.5 per cent range as announced in the October monetary policy review because of a strong manufacturing sector.

The RBI governor also stuck to the inflation estimate of 6.5 percent for the current fiscal despite a recent spurt in the inflation rate as there were some signs of a moderation in global oil prices.

"On balance we feel that the assessment made about inflation in the October policy is still valid," Reddy told reporters.

"The domestic petroleum product prices increase was not unexpected. There are, however, some indications of moderation of international oil prices," he added.

Last week, the government increased prices of petrol, diesel and cooking gas for the first time in three months to align domestic and global prices, which could stoke inflation in the economy and put pressure on interest rates.

Reddy also said the government's market borrowing programme was going well.