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Business
FINANCIAL SCENE
Resilient banking system
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The Reserve Bank of India’s annual report provides wealth of data
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The drive towards more inclusive banking and a much higher standard of customer service are the two defining aspects of future commercial banking.
The annual report of the Reserve Bank of India, Trend and Progress of Banking in India, is the most authoritative guide to Indian banking. The latest report is a mine of information on the developments in the Indian financial sector over the past year.
Indian banks, according to the report, are on a sound footing thanks to the financial sector reform. They have become “strong, healthy, dynamic and resilient — a necessary condition for sustained economic growth and financial stability”.
Other institutions such as the regional rural banks and urban co-operative banks will however have to be strengthened. The RBI lists out a number of tasks that policy makers and the financial sector will have to undertake in the days to come.
One, the major challenge is to raise resources for meeting the demands of a growing economy. Banks and institutions need to meet newer and tighter standards of capital adequacy for which they have to mobilise resources.
Two, correcting the urban bias in Indian banking is another big task. Financial inclusion, imparting financial literacy and in general ‘democratising’ the financial sector have all engaged policy makers. There is ample scope for increasing credit dispensation in relatively small towns. Much greater technology adoption and choice of appropriate delivery channels are some of the related tasks that will make banking more inclusive as well as viable in rural areas.
Three, the need to increase credit flow to agriculture and small scale has been emphasised many times before. Recently the RBI modified the definition of priority sector to make lending to it more purposeful and socially oriented.
Four, for a number of reasons banks’ interest margins have come under pressure. While high growth in the volume of business has helped conceal the falling profitability, the way out is to contain non-operating costs and search for non-interest sources of income.
Five, globalisation is both a threat and an opportunity. There is increased competition and, thanks to technology, greater product innovation. Some of the products are extremely complex and it is difficult to pinpoint the place where the risk lies. Complexity in financial innovation leads to a situation where regulation and supervision may not quite be adept at understanding, leave alone minimising the risks. Recent experiences in the U.S. suggest that some of the products devised recently by pooling sub-prime mortgages have not been understood even by their creators.
The above have been the main challenges before the financial sector in recent times. Some of these are also highly topical. Among these, the RBI dwells at some length on financial inclusion and customer service.
Financial inclusion
The theoretical basis for policy level support to financial inclusion is strong. There is information asymmetry in the financial markets. Banks may not assess the potential profitability of customers while some potential customers may keep away from the financial sector fearing rejection. Hence, as a desirable policy objective, financial inclusion aims at extending the coverage of the banking habit without impinging on banks’ profitability. Banks have been opening no-frills accounts which offer basic banking services to all those who approach them. They have also undertaken to spread the message of inclusive banking. A voluntary code of conduct has been drawn up by most banks for this purpose.
According to the RBI, financial inclusion is not merely about credit dispensation. In a broad sense it aims to connect people with the banking system, giving them access to the payments system . Such a strategy must however be viable for the banks and others offering these services. Micro finance has been recognised as a tool for extending banking services to the poor. Great efforts are on to place micro financing on a sound footing.
There is another way of looking at inclusive banking. The growth of banking business in areas hitherto unbanked holds the key to larger resource mobilisation. It is in this context too that the role of technology needs re-emphasis.
The RBI has taken several initiatives recently to protect customers’ rights, enhance the quality of customer services and strengthen the grievance redressal mechanism at the bank level as well as at the central bank’s level. The Code of Banks’ Commitment to Customers was released on July1, 2006.
The Banking Ombudsman Scheme was amended on May 24, 2007 to expand its coverage. Easy comparison of service charges and fees of different banks has now been made possible with the RBI insisting on such a working both on the individual bank’s website and at the bank branch.
A working group appointed by the RBI examines issues such as basic banking services to be rendered to individual customers, the methodology adopted by the banks and the reasonableness of charges. The RBI holds the view that the development of customer centric banking practices is the cornerstone of any successful banking system.
C.R.L. NARASIMHAN
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