PSBs will prove to be unequal in competition: Raghuram

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Hyderabad, Jun 13: Financial sector can grow tremendously both in the domestic and international market with appropriate policy changes. There is a need for reform now to take financial services to the masses, said Raghuram Rajan, Eric H Gleacher distinguished service professor of finance University of Chicago and chair-committee on financial sector reform, Planning Commission, government of India.

Addressing a conference on Indian banking organised by Indian School of Business he said, “We need reforms now as despite the focus on credit, 75% of borrowing by the bottom half of the Indian households is still from the informal sources and only 12% is from the banks, as per a recent survey on financial habits of households”.

He said, “PSBs are lagging behind. They do not have the clients, staff, automation or the capital like the private or foreign banks to meet the needs of the economy. They will not be able to overcome the situation as the government will not let go of their stake in the PSBs. Due to this, PSBs will prove to be unequal to the competition. Reserve Bank of India (RBI), on the other hand will try and regulate the foreign and private sector banks especially to restrict the competition to the PSBs.

What actually needs to be done for the PSBs is that, we need to create stronger boards with more powers, devolve the power to appoint and compensate top executives on the board, bring in strategic investors with voting rights”, he said.

Also, the government should look at privatising atleast one or two PSBs, see the impact and then judge on what is the right way for the PSBs. They should help the banks to improve their competitiveness and efficiency levels by freeing them to set up branches and ATMs and also be more liberal in allowing takeovers and mergers, he added.

He said, “Infrastructure financing needs enormous amount of funds. And the financial institutions that are there right now do not have the scale or the market to finance these needs. International forces, like the capital flows and commodity prices are buffeting our economy. We need to have a proper macro economic framework to deal with these issues”. The fiscal policy also needs attention as there is slippage because of the populist measures which would inturn reduce the confidence of foreign investors.