The Hindu : National : Next phase of banking reforms under way

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Sunday, Jun 05, 2005

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National

Next phase of banking reforms under way

Special Correspondent

People familiar with the Indian banking system had fears that a crisis would envelop the economy in a cloud of non-performing loans. But the steady and phased approach to reforms had brought Indian banking out of the woods

HISTORIC OCCASION: Prime Minister Manmohan Singh at the inauguration of State Bank of India's bicentennial celebrations in Mumbai on Saturday. Others (from right) are: Reserve Bank of India Governor Y.V. Reddy, Union Finance Minister P.Chidambaram, Maharashtra Chief Minister Vilasrao Deshmukh and SBI chairman A.K. Purwar. — Photo: Shashi Ashiwal

MUMBAI: Prime Minister Manmohan Singh has asked banks to provide adequate long-term finance to the small and medium industries and agriculture and to look again at the organisational structure of the rural branches.

Signalling the next round of banking reforms, Dr. Singh said the first phase was coming to a close and "we are moving on to the next phase."

"With the gradual disappearance of development banks in their original form, a gap in credit availability is emerging. There is some concern that adequate long-term finance is not available to the medium and more particularly small industries," he said

He waslaunching the bicentennial celebrations of the State Bank of India here.

Debt market

In providing adequate long-term finance to the industry, Dr. Singh said that an active debt market needed to be developed. This "will go to satisfy the long-term capital requirements of large and medium industries." Banks should expand their credit portfolio to include increased provision of long-term finance to the small-scale industries.

There was need to expand the credit to agriculture. "While banks have achieved a higher growth in provision of credit to agricultural and the allied activities last year, the momentum must be carried further." Provision of credit for high-tech agriculture was no different from providing credit to industry. Provision of credit to farmers with surplus was also of a similar nature.

The small and marginal farmers needed special attention as they constituted the bulk and accounted for a significant proportion of the total output.

Dr. Singh suggested "a re-look" at the organisational structure of the rural branches of banks. Apart from the need for empathy, the "rural branches go beyond providing credit and extend a helping hand," in terms of advice on a wide variety of farm issues. " They must also establish links with input suppliers. We may have to think in terms of restructuring the rural branches of commercial banks so that credit will be supplemented with extension and counselling."

The Prime Minister advocated greater autonomy in staff management and in determining the organisational structure of the public sector banks. "Greater accountability must necessarily go hand in hand with greater autonomy." A properly designated incentive system that improved productivity and encouraged the employees to deliver quality must be clearly spelt out.

"One of the most successful components of our reform programme was in banking," Dr. Singh said. People familiar with the Indian banking system had fears that a crisis would envelop the economy in a cloud of non-performing loans. But the steady and phased approach to reforms had brought Indian banking out of the woods. New growth areas for lending had emerged in retail lending, particularly in home and automobile finance. "If there is one aspect in which we can confidentially assert that India is ahead of China, that is in the robustness and soundness of our banking system," he added.

In the years ahead, the Indian financial system would grow not only in size but also in complexity as the forces of competition gained further momentum and financial markets acquired greater breath and depth. "This is apparent from the high degree of international interest in our banking sector," he said. To be effective, relevant and useful, the banking system must respond to the changes in the real sectors.

Union Finance Minister P. Chidambaram called upon the banking sector for credit expansion to achieve an eight per cent growth of economy. Indian exports and imports would soon touch $200 billion.

The growth in trade last year was at 24 per cent. For this type of growth to be sustained, the banks had to finance Indian trade.

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