Need to make banks more vibrant, says Rajan

Reserve Bank Governor Raghuram Rajan today said there is a need to make country's banking system more vibrant and to strengthen the markets.
"We need to do a lot of things to make our banking sector more vibrant," Rajan said during an interactive session with Singapore's Deputy Prime Minister Tharman Shanmugaratnam at a CII event here.
He said the entry of a whole set of new banks of different kinds is going to contribute towards improvement of the sector.
Last year, RBI had given in-principle approval to 11 payment banks and 10 small finance banks. Some of these entities are looking at starting their operations later this year or early next year.

In the first bimonthly policy of the fiscal announced earlier this week, RBI had said it will be looking at issuing more differentiated banking licences.
"In addition to recently licensed differentiated banks such as payments banks and small finance banks, the Reserve Bank will explore the possibilities of licensing other differentiated banks such as custodian banks and banks concentrating on whole-sale and long-term financing," it had said in the policy.

The governor also emphasised on enhancing capacities of existing banks.
"Also, improving the capabilities of the existing banks is extremely important and which is why the asset clean up is part of the answer," he said.

Rajan has set March 2017 as the deadline for banks to clean up their balance sheets.
On markets, he said there is a need to strengthen markets by allowing new instruments and new set of participants.
Stating that if the global economy hasn't got strong
growth even after 7 to 8 years after 2008 meltdown, Rajan said the problem may be that not enough of conventional policy was resorted to.
"Could easy and unconventional monetary policy be increasing be part of the problem? It was part of the solution post financial crisis. Liquidity provision was extremely important. However what was done then has continued... For long," he said.

Asking if an aggressive monetary policy could have run out of steam, he said very low cost and easy capital does not "turf out" inefficient firms.
"Lower the interest rate, the more is the saving... People aren't going out celebrating when interest rates get cut. Rather people are actually saving more because they need pension, they worry about viability of government fund pensions," he said.
If debt levels increase in a country, instead of encouraging more spending, it would start saving knowing the tax burden to pay down the debt.
"You could have perverse effects of very low interest rates, perverse effects of substantial fiscal stimulus, these things eventually run out of steam," he said.

Rajan said it is hard to think in the international economic setting of which assets are free of mis-pricing. "I am not saying they are mispriced, I am saying there is a lot of uncertainty of mispricing given the extremely aggressive monetary policy."
Rajan said one of the concerns of aggressive monetary policy is that it might encourage depreciation of the exchange rate.
"In an environment of weak global demand, when I depreciate my exchange rate making my goods more attractive to the other countries' citizens, but those citizens in that country, they already have weak demand. So what we are doing is essentially taking their demand from them by depreciating our exchange rate," he said.

He said competitive depreciation is a big concern during the Great Depreciation. "These are called 'beggar thy neighbour' policy, you depreciate in order to take demand from others. No industrial country today, except Switzerland, has directly targeted exchange rate. Sweden is talking of doing it, but no country has done it".
The primary effect of cutting interest rate may be to depreciate currency, rather than to generate domestic demand.
On inflation targeting, Rajan said when the rate of price rise threatens to fall below the lower band or zero, one of the options before the governments and central banks is 'helicopter drop' of money -- a term used for central banks printing large amount of currencies and giving it directly to the public or through investment in public projects to spur spending and eventually economic growth.

He, however, said there is a probability that people may not spend the money and save it thereby not contributing to growth.