Mumbai: Reserve Bank of India (RBI) governor D. Subbarao on Wednesday said Indian banks cannot afford to be “boring”, or remain restricted to their basic functions of lending and taking deposits, given the challenges ahead.
Speaking at a banking and finance conference in Mumbai organized by the Indian Merchants’ Chamber and Institute of Chartered Accountants India, the governor also questioned a recent argument by Nobel laureate and New York Times columnist Paul Krugman who said that the way to reform banking is to once again make it boring. Krugman had said that whenever banking has been exciting and interesting, paid well and attracted intellectual talents, it has got out of hand and jeopardized the stability of the real sector.
“In fact, I will go further and argue that boring banking is an oxymoron in the Indian case,” Subbarao said at the conference. He said Indian banks face a number of challenges and “meeting these challenges is going to demand lateral thinking, entrepreneurship and management calibre—all a far cry from anything like boring”.
Innovation call: D. Subbarao. Abhijit Bhatlekar/Mint
Subbarao pointed out that financial inclusion remains a big challenge for the Indian banking industry. According to him, out of the about 600,000 habitation centres in the country, only about 30,000 are covered by commercial banks.
Although the central bank has taken a number of steps to address the issue of financial inclusion, “what is clear, though, is that it is not possible to cover a country of a billion-plus people, spread over 600,000 habitations, covering vast distances, with poor infrastructure and sometimes inhospitable terrain by traditional brick and mortar branches.
“Financial inclusion is especially valuable as it will at once promote both growth and equity. I can hardly overemphasize how big a challenge financial inclusion is for banks, for the banking regulator and for the government. Working to meet this challenge can hardly be a boring proposition,” he said.
Another challenge for Indian banks is financing infrastructure projects, the central banker said. As per the 11th Plan, India will need $520 billion (Rs24 trillion) in the five years through 2012.
Almost half of this investment is to be funded through debt, and as much as 43% of this total debt requirement, or 21% of the overall planned investment, is planned to be financed by banks. These numbers are due to be updated in RBI’s mid-term review.
However, Subbarao reiterated that regardless of any revision, infrastructure financing needs remained huge, and that this “huge and growing demand of infrastructure finance will have to be met even as banks wrestle with expanding their traditional banking services”.
While infrastructure typically requires long-term financing, banks’ main source of financing is deposits, which are relatively shorter term. Although this asset-liability mismatch problem is universal, in advanced economies, the long-term finance space is filled by insurance companies, and pension and provident funds.
India needs to clear pending reforms in the infrastructure funding space so that new sources of long-term financing can be accessed, Subbarao said.
He also predicted that Indian banks would increase their presence abroad while foreign banks would have a larger presence here. The task for the Indian banks, he said, is to learn to compete abroad and to set the terms of the competition at home.
Interest rate futures, which were introduced in India earlier this year, as were repurchases on corporate bonds and credit default swaps will facilitate financing for infrastructure projects, he said. RBI expects final guidelines on corporate bond repurchase agreements this month, he said.
Bloomberg contributed to this story.