Govt, RBI working to lower banking costs, expand reach: FM

"The cost of banking intermediaries in India is high and bank penetration is limited to only a few customer segments and geographies," Mukherjee said here today.

"We are trying to address this in collaboration with the Reserve Bank of India, and with the active participation of the banking and non-banking financial entities," he added.
Mukherjee also said that there was a need to "reflect upon possible flaws in our system and address them to withstand adversities. We need to make our financial sector more competitive by enhancing efficiency and transparency."

"While greater competition is welcome, we have to guard against the competitive race to the bottom," he said, while expressing hope that this perspective would guide the growth of Indian banking system in the coming years.

Mukherjee was speaking at Sir Sorabji Pochkhanawala Memorial Lecture 2011 as part of the centenary celebrations of Central Bank of India. The PSU bank was set up by Sir Sorabji Pochkhanawala.

The Finance Minister said that PSU banks were playing a very important role in India's economic growth and they constitute over 72 per cent of the banking sector assets in the country.

"While they are expected to improve their outreach and scalability for sustaining high growth of the economy, they are second to none in retail banking practices and profitability.

"There are, however, several concerns that need to be fully addressed," Mukherjee said, in reference to the issues like high costs and need to expand the banks' reach to more customer segments and geographies.

The minister said that most of the financial sector policies in the past few decades were aimed at accelerating the penetration of the banking and financial services.

"However, as I said, the outcomes of these efforts are yet to show the desired results. Newer perspectives and approaches towards financial inclusion are the need of the hour.

"There is a case for the policy makers and other stake holders to re-strategize the financial policies that are meant to reach the un-reached and the unbanked sections of our country," he added.

To address the issue of capital constraints faced by the PSU banks, Mukherjee said the government had provided over Rs 20,000 crore towards recapitalisation of public sector banks during 2010-11.

"An additional amount of Rs 6,000 crore is also being provided for 2011-12. This will enable the PSBs to meet the credit requirements of the growing economy," he added.

Lauding Indian financial system for its resilience during recent global economic crisis, Mukherjee also said that the reforms of international standards needed to be adapted to local conditions.

"In the post-crisis period, financial stability and the banking system has become an integral part of policy discussions and macroeconomic objectives in the developed and the developing world.

"... The fact that India has not gone through any financial turbulence, as a result of the earlier phase of financial deregulation, is a testimony to our consistent view that reforms in global standards have to be adapted to local conditions," he added.

Mukherjee said that Indian banks were well regulated, vibrant, fast growing and match the global best practices in capital adequacy, risk management and business growth.
"Our Banks are doing a commendable job in meeting vast banking and credit requirements of an economy growing at close to 9 per cent in the last few years," he added.

Mukherjee said that the global financial crisis also led to India "rethink some of our principles of economic and financial policy making."

"We have seen how unfettered growth of financial sector can have dangerous implications for the real sector, both in the developed and the developing world.
"There is much that we need to know about their functioning, the best practices that underpin the creation of new financial products and the related oversight issues so as to promote financial stability," he added.

Mukherjee said that India had been "more fortunate in surviving the crisis without major disruptions and have recovered growth momentum much faster than most others."

"In the fiscal year 2010-11, the Indian economy is expected to record a GDP growth of 8.6 per cent which takes us back on the high growth path that the economy was traversing on in the years prior to the crisis."

"This (resilience) has happened even as the economy has become more integrated with global markets. It shows that globalisation and economic resilience can go hand in hand."
He also asserted that reforms would continue and a high-profile panel tasked with cleaning up of these rules will hold its first meeting in next few days.

The Financial Sector Legislative Reforms Commission (FSLRC) "will have its first meeting in the coming days to rewrite and clean up the financial sector laws and bring them in line with the requirements of the sector," he added.

Also as part of the reforms agenda, the government has set up an apex-level Financial Stability and Development Council (FSDC), with a view to strengthen and institutionalise the mechanism for maintaining financial stability, he added.