The task ahead for Reserve Bank-LiveMint 9th June 2014
With elections over and a stable government in place, things that can be expected from RBI include focus on financial inclusion, infrastructure, debt market, governance at PSU banks
The change in the language of the Reserve Bank of India’s (RBI) second bi-monthly policy review last week is unmistakable. The stance has become softer and the central bank’s concerns for sagging growth are pronounced. A stable government, in place after three decades, can play a critical role in containing inflation and pushing for economic growth by appreciating the importance of fiscal consolidation. RBI governor Raghuram Rajan has met both Prime Minister Narendra Modi and finance minister Arun Jaitley ahead of the policy review. I don’t know what transpired at these meetings but with elections over and a stable government in place in the world’s largest democracy, I would expect the following things from RBI over the next few months.
First, the Indian central bank in right earnest may now start working on opening a window for differentiated bank licences. In Asia’s third largest economy, where only 35% of the adult population has access to formal banking services, the debate has all along been on whether we need a few large banks or many small banks. RBI seems to have reached a conclusion that we need both. We may see the guidelines for payments banks soon and this could be followed by new norms for small banks as well as universal banks.
The payments banks can be created by converting prepaid payment issuers (PPIs). There are more than two dozen PPIs in India that provide mobile wallets or cards that customers can use to make payments with the money that is stored in them. These banks will not be into lending and their business model will evolve around liquidity and float money. I will not be surprised if we see the first set of payments banks being born next fiscal year.
Second, we may see a renewed emphasis on spreading banking services or the so-called financial inclusion. The model of banking correspondents—through which the not-so-nimble-footed public sector banks have been trying to expand their footprint in rural India—needs to be relooked and liberalized. Besides, there could be a new thrust on the use of technology to expand banking services. This can be achieved by coordination between banks and mobile network operators. This has already started in a small way and if we want to spread formal banking services deeper into the hinterland of India, the banking regulator must encourage greater coordination in this field.
Third, as infrastructure is set to emerge as one of the main focus areas of the new government, RBI is expected to create new avenues for long-term resources that can support core projects. This can be done by allowing commercial banks to float long-term bonds, say between eight and 20 years. These bonds can be exempted from the requirements of cash reserve ratio (CRR) and statutory liquidity ratio (SLR). CRR refers to the portion of deposits that banks need to keep with RBI on which they don’t earn any interest and SLR is their compulsory bond holding. Currently, CRR is pegged at 4% of a bank’s deposits and a bank needs to invest at least 23% of deposits in government bonds.
Loans to the infrastructure sector should be considered a priority but money raised through long-term bonds should not be subjected to the so-called priority sector lending norms under which banks need to give loans to agriculture and small-scale industries to the extent of 40% of their total loan book. With implicit government guarantee, such bonds can offer slightly higher interest rates than government bonds and generate liquidity for banks.
Fourth, along with this, the banking regulator, in close coordination with the capital markets regulator, should take steps to deepen the debt market to ease pressure on the banking system.
Fifth, RBI is expected to focus on governance in public sector banks and strengthening their boards. A panel set up by the central bank to review the governance of bank boards has suggested that the government—the majority owner of public sector banks—should change the governance structure at these banks, make them competitive and push up their market value. This will free the government from the burden of pumping in capital into these banks every year.
Even before the panel headed by P.J. Nayak, former Axis Bank Ltd chairman and Morgan Stanley India Co. Pvt. Ltd chief, outlined the reasons behind the inherent inefficiency of public sector banks that have been piling up bad assets, RBI had been interacting with the finance ministry to change the structure of bank boards and reform the human resources policy by giving a longer tenure to the chairmen and allowing banks to offer market-related salaries to their employees, among other things. The government may not agree to pare its stake below 51% but it can always find ways of holding the stake indirectly through a bank holding company. This will free bank employees from the shackles of investigative agencies such as the Central Bureau of Investigation and the Central Vigilance Commission, and speed up the decision-making process on the one hand and, on the other, prop up their valuation in the market.
Finally, formal inflation-targeting and the setting up of a monetary policy committee, as recommended by a panel headed by RBI deputy governor Urjit Patel, may have to wait as the current government doesn’t seem to be favourably inclined to adopt this at this point. However, RBI is expected to follow the glide path charted out by the panel—achieving 8% retail inflation by January 2015 and 6% by January 2016. Indeed, retail inflation will remain the nominal anchor for the monetary policy framework but I don’t expect the central bank to formally adopt the concept of inflation-targeting, at least in the next two years.
Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of Sahara: The Untold Story and A Bank for the Buck
No comments:
Post a Comment