Banks have been in the forefront of Indian growth story. In the last few quarters though, increased inflation and Government measures to rein it, has affected the Banks. The interest rate has been raised by the Government many times in 2010. Increasing interest rate impacts bank’s businesses directly.
In the meantime, as India continues in the growth path, top bankers have pondered over the need of creating big banks that can finance the capital intensive business expansion, high value merger and acquisition, and bigger loan to fund large projects. O P Bhatt, the chairman of SBI has openly advocated the need of big banks to fuel Indian growth in the next few decades. In fact, bankers have been looking forward to many other reforms in the financial sector.
Bankers’ Wish list
As part of the discussion with various stakeholders in Indian growth story, finance minister, Pranab Mukherjee has met bankers and financial experts in the country.
Year 2010 was a good year for the world and especially for India. The world came out of recession and India regained its growth trajectory of high single digit growth despite facing one of the worst global recessions in last 100 years.
Now that the dust has settled to large extent, Governments across the world have decided to formulate policies that encourage financial stability and fiscal prudence. There are going to be big changes in financial sector including Indian financial sector. Banks have been in the middle of this and certainly they have expectation from the Government in order to enable them serve the financial needs of the common man and industries.
Clarity on norms to issue banking licences
In the last budget, the Government announced that the work will start on guidelines for new bank licenses, especially to industrial houses and non-banking financial corporations (NBFC). As part of this exercise, Government and RBI started discussion with various stakeholders on the guidelines and norms. The discussion has been over and RBI has already taken the feedback from bankers, policy makers, and economists on this issue.
The feedback has been both cautionary and encouraging. The banking industry will expect the finance minister and RBI to clarify the stand in this budget with clear cut norms for issuing licenses to new banks. Many industrial houses have shown interest in setting up banking services.
Voting power of foreign entities
Existing rules limit the voting rights of foreign entities to 10% irrespective of their proportion in the stake. The banking industry expects the Government to remove this clause as a part of broader banking regulation amendment bill and let foreign entities have the voting power in proportion to their stake. This will allow more capital to flow in this sector and provide much needed impetus to the Government’s effort to provide more sources of loan to industry and retail.
Thrust on Government spending
There is feeling among bankers that Government’s spending is not enough to ease the liquidity situation and hence the scale of Government spending must be increased. Raising the interest rate to tame the inflation is a natural step but it further worsens the liquidity situation. The banking industry wishes that Government will remove all the constraints from public spending and clearly demonstrate its focus on resolving tight liquidity situation. RBI Governor, D Subbarao has also urged the Government to spend.
Support to banks in terms of Capital
Indian banks are not as competitive as their international counterpart in the global arena. Reiterating his often made comments on the need for big banks in India, the SBI Chairman has asked the Government for more support to banks in terms of capital. This will make our banks competitive with international banks in operation as well as reach.
Support for financial inclusion
There was discussion on financial inclusion and bankers expect the finance minister to incentivise the banks to set up branches in rural areas. The operational cost in rural areas is high with respect to the revenues because of low value deposits. The banking industry will need help in setting up operations in rural population which are not yet served by banking services. In fact Government has given positive hint in this direction about setting up a fund from which all banks can withdraw to fund some of their operations.
Clarity on Financial Stability and Development Council
The Government has also set up Financial Stability and Development Council (FSDC), a regulatory body to oversee issues related to regulation, financial inclusion, and financial stability. The idea was mooted in the last budget. However, banking sector would certainly like to get clarity on the scope of the council.