CHAIRMAN S SPEECH FOR THE 1 ST STATE BANK BANKING &ECONOMIC CONCLAVE CHALLENGES TO INDIAN BANKING IN AN EMERGING ENVIRONMENT

Transcription

1 CHAIRMAN S SPEECH FOR THE 1 ST STATE BANK BANKING &ECONOMIC CONCLAVE CHALLENGES TO INDIAN BANKING IN AN EMERGING ENVIRONMENT 1. Dr. Raghuram Rajan, Governor Reserve Bank of India, distinguished guests on the dais, invitees from the print and electronic media, my colleagues from the financial industry, ladies and gentlemen. Good morning to all of you. I extend a warm welcome to all at State Bank of India for the 1 st State Bank Banking and Economic Conclave The theme of today s conclave is Indian Banking in an Emerging Environment. There is an old Chinese proverb: may you live in interesting times. I feel the present generation of young and dynamic Indians are indeed blessed, as they will strive to carve a place for themselves in an emerging environment, which is indeed challenging. 3. In my address today, I shall put forth some views as to what is the emerging environment that the financial Institutions and in particular the banks have to deal with. The various panels shall deliberate upon some of the dimensions of the emerging environment and their relevance to the Bank s business. I hope participants will find such discussions interesting and thought provoking. EXTERNAL ENVIRONMENT 4. The global economy now looks positive with 3.5% growth projected for The developed economy led by the US and UK look better although the Euro Zone economies are still in a recovery mode. For higher growth in world GDP it is now time for emerging market economies particularly China and India to rise to the expectations and provide the required impetus. 5. The present challenges to global economy stem from the responses to the Financial Crisis that started in The root cause of this crisis was reliance on debt to finance current consumption in the US and Euro areas. Hence unless the economic system as a whole delivers, the growth prospects of the global economy may falter. Hence an effective resolution for Financial Institutions from Corporate insolvency and insolvency in Financial Institution will be the next level of major policy intervention. This, in my opinion, is the first ground reality that has to be 1

2 acknowledged and RBI s recent report on Resolution Regimes for Financial Institutions is an effort in that direction. DOMESTIC ENVIRONMENT 6. The domestic environment on the other hand in India has not been immune to the developments in the rest of the world. Symptomatic of the global slowdown, India s economy has also entered a cyclical downturn. The GDP growth has dropped from its peak of 8.9% in FY11 to 4.7% in FY However the uncertainties on account of elections stand resolved. A stable mandate in the Lower House of Parliament has laid the foundation of recovery. The first step of the new Govt has been to resolve the strain in the politico-bureaucracy relationship which led to what is known as policy paralysis. This, we hope, will speed up decision making and raise the bar of governance. Now all eyes are on the budget when the new Govt will communicate the future road map for economic policy and reform. We will have to wait for a few more days, but the mood is highly optimistic. 8. You will be glad to know that SBI based on its loan portfolio and macro data is now giving final shape to the construction of a conservative yet robust forward indicator for economic activity. As a starting point we already have assiduously detected the forward looking capacity from our portfolio and juxtaposed with the macro numbers. This SBI monthly Manufacturing Index will surely be a powerful leading indicator that we hope may eventually be used as a policy input. For those who are interested to know the initial results, you will be glad to know that such an Index is showing a definite uptick in the next three months. We will soon release the details of this Index that will be made available in the 1 st week of every month. 9. To return to the agenda for today: Dr. Rajan will initiate the conclave by sharing his views on sequencing the various recommendations by the Financial Sector Legislative Reforms Commission. In our view, the recommendations of the FSLRC in creation of a financial regulatory architecture are revolutionary. The FSLRC has adopted a principal based approach to drafting financial regulations as against the rule based 2

3 approach followed now. Under this approach the legislature will enact only broad principles which are applicable irrespective of financial and technological innovation. We therefore need to be vigilant that this approach is consistent with rule making across time and space. 10. Interestingly the other significant FSLRC recommendation on Monetary Policy is that the objective of such policies will be decided in consultation with the Govt. This will be a quantitative target that must be met, and it will be an inflation target in most years, but the Govt. will have the flexibility to change the target to something else, such as a fixed exchange rate or nominal GDP. Clearly there seems to be a point of convergence across the Govt and RBI in terms of an inflation targeting framework. 11. We need to note also that the FSLRC proposes to empower the Central Govt to change the meaning of terms such as financial product and financial services. This will help to the Govt rein in illegal investment schemes that seek to escape regulation by placing themselves in gaps and loop holes in the legal framework. 12. Subsequent to Dr. Rajan s address we have an eminent panel from Industry to discuss what could be the country s best model for growth, given the pressures of demography and the need to create jobs. In this context, an oft asked question has been whether given the experience of the recent past the Banks will continue to finance Infrastructure as such lending is projected at 20% of the Rs 55 lac crs required for infra build during the 12 th plan. 13. This time around I believe Banks will need to ensure that their risk rating models give due weightage to political and regulatory risk apart from the standard risk weightages provided for sponsor, operating, market and financial risks. However, the Banks look forward to deriving some comfort regarding the time that may be required to obtain clearances and approvals to be able to look at financing infrastructure again, and our request to the new Govt has been to comprehensively address this issue. This apart, Bank s will look for greater transparency in respect of Corporates equity sourcing plans and if dependant on capital market raising, the nature of contingency planning, should the capital markets be difficult to approach. 3

4 The other area that seems to need a leg up, is financing of MSMEs for its job creation abilities. In my view, the growth in this sector is hampered by two major factors the lack of equity and the inability of small players to obtain payments within reasonable time. To help the MSMEs realise bills on time there is a need for a platform on which bills could be raised on buyers, be they Industry Majors, Pvt or Public, with the buyers mandated to accept or reject the bill within a reasonable period of say 30 days. This would go a long way in improving the health and profitability of MSMEs which as per independent estimates could go up as much as 25%. I believe some work in this area is already being done by RBI and we would gladly welcome the initiative. According to the official data, there are nearly 70 clearances required annually for business to be opened and more than 100 returns have to be filed in one year. Greatest cost of these procedures and processes falls on SMEs. Additionally, as per surveys, there are in all (counting both the Central and State Governments) 1240 regulations that apply to the industrial sector. This is far too severe a compliance requirement especially for the SMEs. 14. No wonder that we are ranked 132 in terms of ease of doing business. Surely a single window for such matters is the need of the hour and we request the Govt. accordingly. 15. While equity is important for MSMEs, and we have given a few suggestions on differentiated funds that could be attempted under the guidance of the Govt, equity is no less required for our large Corporates as well, as mentioned earlier. Here however, we are very often held hostage to sentiment as demonstrated by the gyrations in the stock markets in the recent past. 16. The 4 th Estate is a powerful part of our Society and has a role to play in managing sentiments while ensuring free and fair reportage. The influence of the written word as well as that of electronic media in the future of this country will be immense. We have therefore a panel of distinguished media persons to debate and lay out their role in nation building. This is an unusual panel for such a conclave, and so in the language of the media you saw it first here. 4

5 17. The expectations of growth in the economy also brings to the fore the need for capital for the Banking sector. As the economy achieves trend growth of 8-9% the requirement for credit will grow and consequently the need for Bank Capital. To my mind the exchequer will need to find ways to find the required amount and dilution of stake as suggested by the Nayak committee is one of them. 18. Our third panel consisting of distinguished Treasury professionals will debate the matter of raising Bank capital and hopefully will come up with some out of the box recommendations. 19. While on this subject I cannot resist the temptation to add that for Indian Banks the high level of pre-emption at 22.5% SLR and 4% CRR is an added burden. The reduction of SLR last month was thus a welcome step and we look forward to many more such, to increase lendable funds with the Banks. 20. To sum up, the expectations are high, the potential immense, but the resources are constrained. In such a situation our intelligentsia need to don their thinking caps. We hope that our last panel of the day consisting of noted economists will do just that and come up with an agenda for the new Govt. 21. I request the audience to participate enthusiastically during the question hours that will follow each panel discussion. At the end, it is the participation by all, both in these sessions, as well as in nation building, that will make the difference. 22. Thank You. 23. I now request Dr. Rajan to please give his key note address. 5