Business Standard

RBI hopes to put on-tap banking license soon: Raghuram Rajan

The RBI governor refused to comment on fiscal deficit so close to the Union Budget

Rajan puts the ball in Jaitley's court

BS Reporter Mumbai
Reserve Bank of India (RBI) Governor Raghuram Rajan on Saturday said the central bank wants to put universal bank license on-tap soon and wished to see different kind of institutions compete with each other and bring innovation in the process. 

As a regulator, the RBI will create “road bumps,” but will not stop the institutions from doing experimentation. For example, if card issuing companies are willing to take stand as guarantor against misuse of their cards, the central bank is ready to allow one-factor authentication, from the current restricted two-factor norms.  

“More participants in the financial system will increase depth. But we have to be careful that we always move forward step by step,” Rajan said at the fourteenth K P Hormis Commemorative Lecture, at Kochi. The lecture was broadcast online. 
 
“As the country develops, we will increasingly be creating supporting framework so that banks can seek profitability. We will bring more institutions, not traditional institutions, but many new different kinds of institutions," he added.  

“After a decade or so, we have had two private banks coming up last year, then this year as well as in the next number of payments banks and small finance banks will enter and we hope to put the universal bank license back on-tap soon,” Rajan said.  

The RBI governor refused to comment on fiscal deficit so close to the Union Budget, scheduled for 29 February.

“So close to the Budget, I don’t want to talk about fiscal deficit. But if there is to be decided that how much to weigh for macroeconomic stability or for growth, as a central banker, I would definitely like to see more weight on the macro stability,” Rajan said, replying to a query after the lecture. 

Replying to another question from the audience, Rajan said low credit growth by public sector banks is actually a good thing for now.

“Sensibly, banks are getting more discriminatory on credit growth. Actually, it is a good development. That way they will be prepared when the economy is coming up and need credit,” Rajan said, adding, “ Let us ensure that we build up capacity before we can fund growth. Currently private sector banks are funding growth. PSU banks will once again take over once they are cleaned (of their bad debts).” 

Under its asset quality review programme, RBI is egging banks to recognise their hidden bad debts so that the balance sheets are cleaned by March 2017. This has caused havoc in bank results and losses reported in the December quarters were enormous, hammering down the bank stocks. 

In his speech on financial sector reforms, Rajan said the market turmoil will calm down soon and banks will be better shaped. With the new entrants like payments banks and small finance banks entering the field, competition will be immense in the banking system but nobody has added advantage over the other. While payments banks will ride on telecom networks to ensure last mile reach and include every Indian in the banking field, small finance banks, with their limited lending operation of up to Rs 25 lakh, will be of help for the small and medium firms. Large banks, meanwhile, have the means to fund large corporate and infrastructure loans and the central bank is in the process of figuring out how to deal with the risk in this kind of large institutions. 

It is important that public sector banks be allowed to develop as individual organisations, rather than remain homogeneous institutions, but for that independent bank boards are a necessity. From next financial year, the bank board bureau will appoint board members of banks in a transparent manner and that will strengthen the bank boards. 

However, adequate compensation is important.

“In trying to attract people of capability, integrity, more of that we will have to figure out how we pay a decent market compensation to board members. If we are really trying to get people to work for government enterprises, we can’t rely only on their patriotism,” Rajan said, adding, "while there will be some people who would want to come and join because of their patriotic belief that they want to make a difference, but along with patriotic we will get those who intend to profit by the board position in other ways if not directly. So that mix of the patriotic and the unscrupulous is something that we have to avoid by better pay and decent compensation to get good people on the board who will run the bank effectively.” 

He also said that the central bank will step up its incognito visits to banks to inspect if mis-selling of products is going on, as people should be protected form unfair practices. 

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First Published: Feb 13 2016 | 9:16 PM IST

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