Innovation need of the hour

REPORT ON TREND AND PROGRESS OF BANKING IN INDIA 2005-06

The Reserve Bank of India (RBI) has said the banking system needs to innovate in order to support and facilitate the anticipated higher growth of the economy in the next few years.

"In view of accelerating economic growth, the main challenge for the banking sector in the coming years would be to expand while maintaining sound financial health. With large credit expansion during the last two years, banking penetration increased on the asset side, but it continues to be relatively low on the liability side," RBI said.

The central bank has called upon banks to focus on reaching the hitherto untapped clients and regions. With increasing competition on the asset side, banks would also need to look for new creditworthy borrowers, while there is an enormous scope, the need is to find innovative methods to reach them, it added.

Banks have to look for new delivery mechanisms that economise on transaction costs and provide better access to currently under-served, while dealing with new consumer and production demands of rural enterprises and that of small and medium enterprises in urban areas.

RBI said in India, the ratio of bank assets or bank deposits to GDP is among the lowest in the world, notwithstanding some increase in recent years.

As banking expansion takes place, the ratio of deposits to GDP first rises and then begins to decline as high-rated corporates begin to successfully tap the capital market.

Given the prudential requirements associated with raising capital through equity issues and inadequately developed private corporate debt market, the rural sector and small and medium enterprises would continue to depend on bank finance to a significant extent.

"This, in effect, provides a lot of room for credit expansion to financing varied and multifaceted activities in the rural areas," the central bank said.