Subbarao: boring banking needs new models

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Mumbai: RBI governor D Subbarao said India cannot afford “boring banking” and banks cannot afford to continue with “stickiness and non-transparency in lending rates”. The challenge for the banking sector, Subbarao said, was to finance the infrastructure deficit that would need re-inventing their business models and take on larger competition from foreign banks.

The governor indicated that banks were not cutting lending rates, even after the RBI had slashed its signalling rates to increase liquidity in the system. “The intermediation cost in India is still high, largely due to high operating costs. The challenge for Indian banks, therefore, is to reduce costs and pass on the benefits to both depositors and lenders.” He made the comments while inaugurating the International Finance and Banking Conference organised by the Indian Merchants’ Chamber on ‘Banking--Crisis and Beyond’ on Wednesday.

The governor was clear that of the four challenges faced by the banking sector, financing the infrastructure deficit was the key one. On infrastructure financing, he said, the big issue is the asset-liability mismatch.

While infrastructure requires long-term funding, the deposits of banksare relatively short-term.

In advanced economies, the long-term finance space is filled by insurers and pension and provident funds.

“If some of the pending legislation gets through, in India too we can expect new sources of long-term financing to open up. But until that happens, the burden of infrastructure financing will have to be met largely by the banks.” he said.

“In order to partly offset this problem, the Reserve Bank has, since 2000, allowed banks to enter into take-out financing arrangements with other financial institutions,’’ Subbarao added.

The Eleventh Five-Year Plan targets a higher infrastructure investment of 9% of GDP by 2011-12, from around 5 % in 2006-07.

This translates into a cumulative infrastructure investment of over Rs 20 trillion ($520 billion) over the Plan period. Almost a half of this investment is to be funded through debt, and as much as 43% of the total debt requirement (21% of overall planned investment) is planned to be financed by banks.

Moving ahead, Indian banks are set to increase their presence abroad, while foreign banks will have a larger presence in India, Subbarao said.

Commenting on the ongoing financial inclusion programmes, Subbaro said the effort should be to give access to at least minimal financial services to the excluded rather than chasing a target.

He said the financial sector’s contribution to economic growth is not been given due recognition.