Banking sector poised for exciting times: D Subbarao

Lists five challenges for Indian bankers

A regulated banking system, described by economist and Nobel laureate Paul Krugman as “boring” in his column in April 2009, need not be the same in Indian context, given the challenges and opportunities that await bankers, according to the Reserve Bank of India (RBI) Governor D Subbarao.

In an hour-long speech laced with anecdotes and humour, he said: “On the contrary, I will say that Indian banking is going to be exciting, adventurous and fulfilling. This is because there are five challenges to the Indian banking system – financial inclusion, infrastructure financing, risk management, efficiency improvement and customer service.”

He said so in the context of reforms implemented in the Indian banking system over the past few years discussed outside India and  adapted to suit to Indian circumstances. “But,” he said, “what we are not implementing is boring banking.”
The phrase “boring banking”, coined by Paul Krugman, became synonymous with a  regulated financial system that focuses on stability to avoid the pitfalls of financial de-regulation that prevailed in the West post-1980s; it became vulnerable and finally led to collapse of the financial system.

Subbarao, who was delivering a speech on the topic “Indian Banking – Looking beyond the crisis” organised by the Bankers’ Club, Bangalore, said that the loosening of regulations in the post-1980s was marked by a belief that the best financial system was one that had least intervention, least intrusion. “This,” he said, “was not based on practical experience or empirical evidence but on ideological philosophy.”

Coming to challenges for Indian bankers, he said, “Financial inclusion is a game-changing development, a great transformational experience. Bankers should know how the poor manage their income that is sporadic, uncertain and uneven. The poor need much better financial management.”

On infrastructure financing, he said,  “Spending in the sector that needs about $1 trillion has to come from the government and the private sector. In the absence of long-term financial institutions, the burden falls on banks.”

According to him, risk management is another key challenge. “To implement Basel III norms, banks will need more risk-based supervision capability.” He added that the norms will also make bank credit more expensive due to high capital and liquidity provisions, making lending at competitive rates difficult for bankers.  
On improving efficiency, he said that banks would have to do a balancing act of delivering reasonable returns to depositors even while ensuring that  lending rates are not high.

‘Black money is an issue’

 In the context of the recent expose on executives of three Indian private banks allegedly involved in money laundering, RBI Governor D Subbarao said, “I can’t at this time make a sweeping statement there are no transactions taking place, but broadly we are safe.  As for the banking system being used for money laundering, our systems and processes are audited.”

He did however concede that black money is an issue in Indian financial system and added that the RBI has instituted transactional level inquiry at the branches that were allegedly involved and also at their head offices.

On rising non-performing assets (NPAs) of banks, he said that they should prevent further expansion of NPAs, despite challenges of economic downturn; systemic issues and incidence of restructured assets become NPAs.