Wednesday, January 2, 2013
Financial Inclusion And Financial Reform
Financial inclusion should be the focus of banking reform and guide fresh licence decisions
(Economic times ) Written BY T T Ram Mohan Professor, IIM-Ahmedabad
Parliament recently approved the Banking Laws (Amendment) Bill that would give RBI powers it had sought in relation to the boards of banks. This is seen as clearing the way for the RBI to go full steam ahead with the issue of licences for new private banks (NPBs), including licences for industrial houses.
That may be so, but banking reform needs a clear focus. What should be the priority at the moment: consolidation, lower costs and margins in banking or financial inclusion? Once this is answered, we would know how to go about issuing new licences for banks.
To begin with consolidation, some of the arguments made in favour of it are easily dealt with. The optimal scale at which banks can operate efficiently (estimated at $10-20 billion, or Rs 50,000-1,00,000 crore) is one that most banks in India already enjoy.
There is no reason why any individual bank should be large enough to meet the funding needs of the bigger Indian companies; consortium financing is a better way of managing risk.
Merging the weaker public sector banks (PSBs) with the stronger ones can render the latter weak. In terms of managing systemic risk, the less concentrated a banking system, the better. The truly persuasive argument for consolidation would be that the sector is much too fragmented to allow banks to be viable.
But this is hardly true of the Indian banking sector. Return on assets for scheduled commercial banks as a whole has been 1% in recent years, which is considered a good figure internationally; that for PSBs is 0.9%.
On to the argument about costs and margins. It is said that operational costs in Indian banking are too high. It is hard to postulate an appropriate level of operational costs for a system because these are specific to the banking model. What is crucial is whether these costs are falling or not.
In India, operational costs as a percentage of assets have fallen by nearly 100 bps since 1997. The net interest margin has remained at close to 3% of assets for most of the post-reform period. It does not follow, however, that this is on account of lack of competition.
One measure of competition is the concentration ratio, defined as the share of the top three banks in total assets. India's concentration ratio of 35% is among the lowest in the world today.
Comparable averages are: advanced economies 60%, Asia 40% and Latin America 55%. There are other reasons why margins have remained high in Indian banking, such as the rising share of highyielding retail assets.
Over time, as financial markets emerge as credible competitors to banks, margins are bound to decline. Until then, it is better to allow margins to remain on the higher side in the interest of stability in banking and also in the interest of the third objective mentioned above: financial inclusion.
Financial inclusion will entail substantial costs upfront. However, it also represents a significant opportunity. It will help banks access a large pool of low-cost saving accounts.
It will open up opportunities for high-yielding micro loans and fee income from the sale of financial products. In the long run, financial inclusion could well be the key to sustaining profitability in banking.
http://economictimes.indiatimes.com/opinion/columnists/t-t-ram-mohan/financial-inclusion-should-be-the-focus-of-banking-reform-and-guide-fresh-licence-decisions/articleshow/17866462.cms
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ReplyDeleteFuture economic system - A common tax system for all nations
Posted by VIJAYA KRUSHNA VARMA
I created a common tax system called "TOP Tax sytem" for all nations without multiple taxes, tax laws, tax collection departments and tax enforcement agencies to relieve 7 billion people of the world from plethora of tax laws, ambiguous and copmlex tax structures, cumbersome accounting, auditing and compulsory tax returns, and costly tax copliance costs. If this new tax system is adopted and implemented by all nations, then citizens will not need to maintain account books and pay Direct taxes on their personal incomes got from salaries/remunerations/fees/donatons/gifts or pay Indirect taxes while running business/industry. There will be absolutely no tax collection expenditure for the Governments and no tax compliance costs for the people. In this new "TOP TAX SYSTEM", taxation, tax collections and tax compliance are unified and integrated in the banking system so that the annual budget preparation of any country will become so easy, simple and time saving. Every account (Main Savings Account) operated by banks will become an involuntary tax paying account just like respiratory system in human body. The tax revenues, to be got from only single tax called 'TOP Tax" at low slab rate(4%only), will be 20 to 30% more than the tax revenues that are presently accruing from multiple taxes(Direct and Indirect) at high slab rates.
Tax Reforms – Taxes without tax laws
A common tax system for all nations
By VIJAYA KRUSHNA VARMA
I am suggesting new methods, models, and innovative and alternative policies in the areas of monetary system, budget preparation, banking finance system, public finance, optimal taxation, tax collection, tax compliance, subsidies, money supply, and fiscal policy to help remove corruption, tax evasion, economic recession, black money, fake currency, ransoms, robberies and societal inequalities. In my opinion, the proposed new economic system may usher in good governance, 100% tax compliance and corruption free environment. It suggests a single tax called “TOP Tax” (Transfer Or Purchase Tax) for both Centre and States combined in place of present multiple Indirect taxes with different slab rates on different goods/commodities/services and multiple Direct taxes with different slab rates, relieving 6.9 billion people of the world from the cobweb of ambiguous and complex tax structures, plethora of tax laws, mandatory and cumbersome accounting, auditing, tax returns and consequent quagmire of all tax related cases. Taxation, tax collection, tax enforcement, tax compliance, allocation of revenues to various ministries or departments and money supply into the economy are unified and integrated in the banking system. Citizens need not maintain separate account books and submit tax returns annually for paying either Direct taxes on personal incomes or Indirect taxes while running business or industry. This new economic system involving a new tax system without multiple taxes, tax laws, tax collection departments, tax tribunals and tax enforcement agencies, envisages 20 to 30 % more revenues than presently accruing from multiple taxes collected by different tax collection departments/agencies. The availability of resources and capital flows, needed for economic recovery, is the self-priming character of the “TOP Tax system” without Government’s fiscal stimulus packages. This new economic system shall be operated by banks at minimum operating cost with limited paper currency (0.4%) and dematerialised money (99.6%) of the total money available in the economy in the particular country, thereby totally eliminating black money, tax evasion, fake currency, corruption and extortions