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Financial innovation, the periodic entry of new banks and better planning by banks are the need of the hour to keep pace with the growing needs of the economy, C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, said.
Addressing a gathering at an award function to felicitate the top performing financial institutions in the country, the former Reserve Bank of India Governor said the Indian banking system is in a good shape. However, there is a need to be watchful and plan well in advance to match the requirements of a growing economy, he added.
ENTRY OF NEW BANKS
Rangarajan suggested that the Reserve Bank of India must lay down entry norms for new banks after estimating the requirements of the economy over the next several decades.
He added that a new bank takes at least two decades to attain a sizeable level.
“If the Indian banking system has to remain competitive over time, there should be periodic entry of new banks. A closed system can only become oligopolistic,” he said.
FINANCIAL INNOVATION AND REGULATION
While admitting that some of the innovation introduced in the financial sector, especially in the developed economies, has compromised the safety of the financial sector, Rangarajan said in the context of an economic shift in a developing nation like India, there is a need to encourage financial innovation.
“India needs to encourage setting up of institutionally-driven vibrant debt markets. An efficient debt market not only helps large industries but also small and medium-scale enterprises,” Rangarajan said.
Since banks have their own limitations regarding mismatch in asset and liability management, there is a need to explore innovative ways to fund infrastructure development in the country.
Post-crisis, regulation has emerged as an important factor in protecting the financial system and preventing systemic risks. Thus, regulations are very important but the scope for financial innovation remains large in India within the regulatory framework, he added.
NEED FOR BETTER PLANNING
He said RBI estimates of capital required for banks to meet the Basel-III norms could be an underestimate.
“The estimate for equity capital, in my view, could turn out to be an underestimate as the required non-equity capital may be difficult to achieve,” Rangarajan said.
A long-term roadmap to fund the capital requirements of public sector banks has to be drawn up otherwise the market share of public sector banks will come down, he warned.
>satyanarayan.iyer@thehindu.co.in
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