Mumbai: Reserve bank governor D Subbarao on Friday pitched for streamlining banking regulations, saying some were “confusing” even though they served the banking system well.
On the existing arrays of laws in the banking sector, he favoured a single legislation to remove inconsistencies.
Subbarao also asserted that the proposed financial sector reforms should be driven more by the sectoral regulator RBI than by a legislative panel.
“Policy direction should drive the work of the proposed financial sector legislative reforms commission and not the other way around”,Subbarao said.
The RBI governor was delivering the inaugural address at the two-day Bancon 2010, one of the premier annual bankers meets.
He said there is an urgent need to streamline the plethora of regulations governing the banking system in the country.
“There is a whole lot confusing laws out there. But it has served the system well by helping maintain an orderly banking system.”
The Banking Regulation Act has not only stood the test of time, but several of its provisions have all helped the Reserve Bank in preventing crises and maintaining financial stability", he said.
“But the recent global financial crisis has taught us that our regulations have to change according to the need of the time..”, SubbaRao said.
Arguing that there is an urgent need for streamlining and fine-tuning the existing array of laws, the governor said, “we need to do so to level the playing field as the existing laws are uneven”.
“A single legislation will bring about clarity and do away with the inconsistencies currently governing the banking system.”
“The prime motivation for rewriting the laws should be to integrate the various statutes, reflect the lessons from the (recent global financial) crisis and aid inclusive growth”, Subbarao said.
He said the global financial crisis threw up a number of areas requiring significant legislative action either because there is no legislation or because the prevailing legislation is inadequate.
SubbaRao said the decision to set up a financial sector legislative reforms commission to rewrite and clean up the financial sector laws, to bring them in line with the requirements of the sector, was very timely and vital.
However, the governor was quick to add, “but I have one caveat. It is important to recognise that bringing about policy changes or regulatory architecture cannot be the remit of a legislative reforms commission"
Such changes have to be debated as a prelude to the work of a commission so that the commission has a clear policy direction”, the RBI governor said.
“In short policy direction should drive the work of the proposed legislative commission and not the other way around”, Subbarao said.
The country’s 81 banks - out of which 24 are state-run, 21 private and rest 34 are foreign banks, are governed by a number of laws.
The Reserve Bank governor today advised banks to cautiously increase their global footprint, both organically and inorganically.
“...Indian banks should increase their global footprint opportunistically even if they do not get to the top of the league table,” RBI governor D Subbarao said
In the wake of the global financial crisis, there has definitely been a pause to the rapid expansion overseas of banks, he said.
Nevertheless, notwithstanding the risks involved, it will be opportune for some of our larger banks to be looking out for opportunities for consolidation both organically and inorganically, Subbarao added.
They should look out more actively in regions which hold out a promise of attractive acquisitions, he said.
India has 81 scheduled commercial banks, of which 26 are in the public sector, 21 are private and 34, foreign.
Subbarao said that as per the current global league tables, based on the size of assets, the country’s largest lender - the State Bank of India (SBI) - together with its subsidiaries, comes in at 74 number, followed by ICICI Bank at 145 and Bank of Baroda at 188.
On meeting Basel III norms, he said Indian banks are comfortably placed in terms of compliance with the new capital rules.
“...a few individual banks may fall short of the Basel III norms and will have to augment their capital. However as the phase-in time allowed is long enough, these banks should be able to make a comfortable adjustment to the enhanced requirement,” Subbarao added.
The Basel III package includes capital buffers, which will entail additional costs for banks with consequent implications for investment and hence for overall growth.