Brace For Deregulated Regime, Psu Banks Told

The Reserve Bank of India (RBI) has exhorted public sector banks to gear up to meet an increasingly deregulated interest rate environment as the countrys financial system moves towards integration with the global system.

Banks have to prepare themselves to grapple with the challenges of competition and convert them into opportunities which call for critical introspection and intelligent anticipation, says an RBI report titled Trend and Progress of Banking in India, 1996, released recently. To effectively compete in the new situation, the public sector banks need to initiate a number of steps expeditiously, says the report adding there is a need to focus on improving customer services and introducing new facilities relating to fund remittances, electronic credit, debit systems and automatic teller machine (ATM) cards.

 

Success in the second phase of reforms will depend primarily on the organisational effectiveness of banks for which the initiatives will have to come from banks themselves, it says, adding there is a need for imaginative corporate planning combined with organisational restructuring to achieve positive results.

The RBI also expressed concern over the high level of non-performing assets (NPAs) currently estimated at Rs 40,000 crore though as a percentage to the total advances of the public sector banks they have come down as in March 1996. The RBI says vigorous efforts for recovery and upgradation of loans must be the chief concern of banks, particularly of those where the NPA proportion is very high. Calling for a transparent settlement procedure in areas where write-offs are involved, the RBI said the recent initiative by some banks in the form of lower margin over prime lending rate on demand loans is a step in the right direction.

Stating that the first stage of the banking sector reform is coming to an end, the RBI cautions that the Indian financial system will grow not only in size but also in complexity as the forces of competition gain further momentum and financial markets acquire greater width and depth.

While the policy environment will remain supportive of healthy growth and development with accent on greater operational flexibility as well as greater prudential regulation and supervision, the thrust of the second phase of reform would have to be on improvement in the organisational effectiveness of banks and other financial entities, it says. According to the RBI, the freedom given to the banks in the determination of the interest rate must be used by them judiciously.

Obviously, the lending rate will have a relationship to the cost of raising funds. Too high a lending rate is not necessarily an advantage to banks as it may be associated with higher risks resulting in what the literature calls adverse selection, says the report. In effect extremely high interest rates can affect the viability of borrowers capacity to repay.

Besides they would be unsustainable as they may eventually result in increasing the non-performing assets of banks.

In fact, the major objective of the financial sector reform is to improve the efficiency of the system and banks have to consciously work towards reducing the spread between cost of raising funds and the rate at which funds are lent, it says.

Banks must pass on the greater part of the efficiency gains to the borrowers in the form of lower lending rates, says the report.