Describing the financial sector as “the heart of the economy”, the Finance Minister, P. Chidambaram, in his budget speech, announced 17 measures across banking, insurance and capital market. Almost all of them do not involve any financial outlays.
Among the few exceptions are the capital infusion to 13 public sector banks (PSBs) aggregating Rs.12,517 crore before March 31 this year, and an additional Rs.40,000 crore next year. Such a large capital infusion is needed to enable the banks to meet the enhanced capital adequacy requirements, as they migrate to the Basel-III norms from April 1.
Capital infusion by the government to buttress the PSBs’ capital is not new and arises from the fact that the government does not, on principle, want to let go the majority equity stake in them, and lose control. The irony is that all PSBs are listed, and their shares, in varying degrees, are faring well. Some of the stronger ones like State Bank of India can easily fund their capital requirements by accessing the capital market but are not allowed to do so. Perhaps, in the not distant future, it should be possible for the government to permit a dilution of its stake to below 51 per cent without letting the banks divest their public sector character. This is a reform measure for long talked about with very little follow-up action.
Regulatory aspects of the financial sector get a look in. The report of the Financial Sector Legislative Reforms Commission due shortly will be acted upon. Also in the regulatory category is the proposal to constitute a Standing Council of Experts in the Ministry of Finance to analyse the international competitiveness of the Indian financial sector, periodically examine the transaction costs of doing business in India, and provide inputs to the government. These two measures are very relevant. In the present Indian context, supervision of financial conglomerates is a big issue. The latest guidelines issued by the Reserve Bank of India (RBI) for licensing new banks have drawn attention to it in a big way. Since India is fast integrating with the rest of the world, it is necessary to keep an informed watch on the competitiveness of Indian financial sector.
Keeping in view the policy goal of financial inclusion, the budget claims that all scheduled commercial banks and all RRBs (regional rural banks) are on core banking solution.
This and the related assurance that all PSBs will have an ATM at all their branches by March 31, 2014, sounds too good to be true but then we have the Finance Minister’s word for it.
Furthering financial inclusion is the buzzword in insurance also. Insurance companies will be allowed to open branches in smaller cities and towns without the permission of the regulator, Insurance Regulatory and Development Authority (IRDA). All towns, with a population of 10,000 or more, will have an office of LIC and an office of one public sector insurance company. The stress on the public sector is important. Only they can be directed. But what such forcible branch expansion does to their profitability is a different issue. Besides, can’t technology be used to increase market coverage as is being done by banks?
In a welcome move, it has been decided that the KYC of banks will be sufficient to acquire insurance policies. It must be ensured that this decision is implemented on the ground without any hassles. Also, getting a KYC from a bank itself is not the easiest of tasks.
Permitting banks to act as insurance brokers is an attractive idea, but for various reasons banking and insurance do not mix well. Among the concerns have been lack of familiarity of insurance products and possible conflict of interest arising out of the fact that at the most basic level both chase a potential customer’s money.
Speeding up third-party motor settlement claims, which are now clogging courts through adalats, is a good idea but where is the infrastructure or for that matter expertise without which alternative dispute settlements such as adalats will not succeed.
Finally, selling micro-insurance products through banking correspondents is a good idea.
It will, however, have a greater chance of success if the products on offer are standardised and made simple and both the correspondent and the potential customers are sufficiently educated.