Opinion - Editorials   

Banking perspectives

The challenges facing the financial sector, in particular the task of extending reform to institutions other than commercial banks, are addressed in the Reserve Bank of India’s report on trend and progress of banking. Financial sector reform initiated in early 1990s has had a profound impact on commercial banks, systemically the most important segment. The task is to extend the benefits of reform to other institutions — urban cooperative banks, regional rural b anks, and rural cooperatives. For all the financial intermediaries, especially the banks, the biggest challenge is to raise enough resources to support the strong economic growth. Policy measures to orient the urban-centric banks towards rural and semi-urban areas have not been wholly successful. However, some banks have turned rural banking profitable by employing better technology and innovative delivery channels. The RBI will play a catalytic role in enhancing cooperation between the States and the banking system. A perennial shortcoming of commercial banks has been their inability to increase the flow of credit to small scale industries and agriculture. With a view to sharply delineating the scope and focussing on the priority sector, the RBI has laid down that, from now on, only highly employment intensive sectors such as agriculture and small scale industries will qualify for priority sector advances.

For the banks, ensuring adequacy of capital has become a challenging task also because of the forthcoming move towards Basel II regulatory norms. The entire banking industry is feeling the pressure of reduced interest margins. This underlines the need to prune down operating costs and identify non-interest sources of income. Even as the financial services industry becomes increasingly global, competition is intensifying, with the distinction between banks and non-banks getting blurred. These trends and wider application of information technology have led to product innovations, some of which are extremely complex. The ongoing sub-prime crisis in the U.S. suggests that the risks in the financially engineered products have not been fully grasped . For the RBI, devising appropriate risk containment measures in India for these products of globalisation has also become an urgent task.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Significant move on political chessboard
Banking perspectives
Pakistan civil society takes on mission impossible
Inadequate judge strength is glaring
Iraq: U.S. and Iran must seek deal
Humans still evolving and faster than ever
Corrections and clarifications
PM candidate Advani
Gujarat polls
Caring for the old

Copyright © 2007, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu