RBI asks Govt to speed up reforms in banking system

Need to increase efficiency through greater entry and competition, says Raghuram Rajan.

August 27, 2015 11:02 pm | Updated September 02, 2016 12:05 pm IST

The Reserve Bank of India (RBI) on Thursday warned the Government that any delay in reform of the banking system in the country would lead to greater risk in the economy. “The current stress in the banking system suggests that the real economy will not wait for the banking system, and a slow pace of reform could lead to greater, rather than lower risk residing in the banking system,” wrote RBI Governor Raghuram Rajan in his overview of the central bank’s annual report 2014-15.

“Financial sector reforms need to move on many fronts,” said Dr. Rajan, adding, “for a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk.” “Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create. The Chinese term this ‘Crossing the river by feeling the stones’. It is an appropriate metaphor to guide our own reforms,” he added.

While talking on financial sector, Dr. Rajan said that “we need to increase efficiency through greater entry and competition.”

The most appropriate institutions will prevail when the competitive arena is level, so we have to remove regulatory privileges as well as impediments wherever possible, especially those that are biased towards some form of ownership or some particular institutional form.

Dr. Rajan also stressed the need for more participation in the country’s financial markets to increase their size, depth, and liquidity.

“Participation is best enhanced not through subventions and subsidies but by creating supporting frameworks that improve transparency, contract enforcement, and protections for market participants against abusive practices,” he added. According to RBI Governor, technology can be very helpful in reducing the costs of supportive frameworks, and can bring hitherto excluded populations into the financial fold. “It is these ideas that guide our medium-term reform strategy.”

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