Former Reserve Bank Governor Y.V. Reddy on Friday said that there was no “crisis” in the Indian banking system, but cautioned that Indian banks would eventually pass into foreign hands if there is no review of current policies.
The shareholding of foreign entities in the large private banks in India is over 70% while in the public sector banks, government and LIC hold bulk ownership and foreigners own majority of the rest of the stake, Reddy said.
“We do not have 100 per cent government-owned banks. We have public sector banks with mixed ownership....Our banking system is predominantly owned by the government, followed by foreigners and rest by Indians. I repeat, least by Indians,” he said.
“The share of public sector banking is, and will, come down and under the current policy, that space will be occupied irrevocably by foreigner-owned banks unless there is a policy change,” Reddy said, delivering a lecture at the Administrative Staff College of India, Hyderabad.
The current policy of ownership and governance in banking needs to be reviewed urgently to correct the outdated and distorted policies, and this should be done before the banking system passes on to foreign owners, he said.
He also opined that there is a need to reduce the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio to international levels for global competitiveness in the system.
“In brief, there is no crisis in banking, but banks are over-burdened with policy-induced obligations. The first step for improving our banking system is a commitment to reduce SLR and CRR to global levels as soon as possible. We can not have globally competitive economy with an over-burdened banking system,” he said.
On NPAs, Mr. Reddy said that not all defaulters were “cheats” but the chance of default increased if there were no incentives for repayment.
“A high-level internal inquiry within the RBI should be undertaken to fix the responsibility for excesses in NPAs in recent years, and more importantly, to suggest and adopt measures to improve the system as whole,” he said.
