Reserve Bank of India Governor D. Subbarao on Wednesday urged bankers to meet the formibale challenges head on. The four challenges were: deepening financial inclusion; financing infrastructure; strengthening risk management; and improving efficiency, he said.
“These are formidable challenges, and meeting them is going to be an exciting, rewarding and fulfilling opportunity. Perish the thought of Indian banking ever getting boring,” said Dr. Subbarao while speaking on ‘Should banking be made boring?: an Indian perspective’. He was addressing the International Finance and Banking Conference, organised by the Indian Merchants’ Chamber and the Institute of Chartered Accountants of India here. The theme of the conference was ‘Banking: crisis and beyond.”
“Commercial banking in India has not penetrated sufficiently to serve the large mass of rural, illiterate and poor people in any meaningful way,” the RBI Governor noted.
Asset-liability mismatch
“A big issue in bank financing of infrastructure is the asset-liability mismatch,” said Dr. Subbarao. While infrastructure typically requires long-term funding, the deposits of banks, their main source of funds, are relatively short-term. The problem of asset-liability mismatch in long-term financing is not unique to India; banks elsewhere too face the same problem. But in advanced economies, the long term finance space is filled by insurance companies and pension and provident funds.
“If some of the pending legislation gets through, in India too we can expect new sources of long-term financing to open up. But until that happens, the burden of infrastructure financing will have to be met largely by the banks,” said Dr. Subbarao. To partly offset this problem, the Reserve Bank has, since 2000, allowed banks to enter into takeout financing arrangements with other financial institutions.
High operating costs
The intermediation cost in India is still high, largely due to high operating costs, said Dr. Subbarao. Non-interest sources of income constitute a small share in total income of banks in India. Although overall efficiency and productivity have improved, resources are not being utilised in the most efficient manner. “There is a degree of stickiness and non-transparency in bank lending rates,” he said.
“The challenge for Indian banks, therefore, is to reduce costs and pass on the benefits to both depositors and lenders,” Dr. Subbarao asserted.
Banks need to develop a culture of risk management at the institutional level. What the crisis has shown is that risk management cannot be done in silos; it demands a more integrated approach with risks and their interconnections across the entire organisation recognised and managed synergistically.
In the wake of the financial crisis there are proposals at the global level to mandate
