Change of guard at Mint Road: old dilemma, new hope

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According to RBI, this suggests that it is the large corporates that have increased their dependence on the banking sector. The major development that has taken place over the last decade is the diversification of credit in India towards retail credit. The share of retail credit comprising housing loans, credit to individuals, credit cards receivables and lending for consumer durables, in total bank credit increased from 6.4% in 1990 to 22.3% in 2007. On the whole, agriculture, large corporates and the retail sector, benefited from credit expansion, while credit growth to the SME sector remained tepid until recently.

Another key issue is government ownership in banks. The issue of ownership in public sector banks needs to be viewed against the changed operating environment. The ownership of public sector banks is not an issue from the efficiency viewpoint, as public sector banks in India now appear to be as efficient as new private and foreign banks, as revealed by various measures. However, the operating environment for banks has been changing rapidly and banks need flexibility to respond to the evolving situation.

Another issue that needs to be considered is the funding of capital requirements of public sector banks, given the present floor of 51% on government equity in public sector banks. In the medium-term, this can become an issue, hampering the growth of public sector banks, if the government is not able to provide adequate capital for their expansion, the RBI report said. The roadmap of foreign banks is due for review in 2009. This would involve several issues. The increased presence of foreign banks, by intensifying competition, may accelerate the consolidation process that is underway. However, at the same time, this may also raise the risk of concentration if mergers/amalgamations involve large banks. The experience of some other countries also suggests that the emergence of large banks due to consolidation has resulted in reduced lending to small enterprises significantly. All these issues would need to be carefully weighed at the time of review.

Also, the policy relating to ownership of banks by commercial interests may have to take full account of international practices, given the issues relating to a potential conflict of interests, increased potential of contagion effects and increased concentration.

Moreover, the trading in currency futures might have been kick-started, but a lot needs to be done to develop a sound forex market.