Fixing India’s lack of financial penetration

Jun 17 2014, 01:55 IST
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SummaryFrom offloading government stake in PSU banks to consolidating the insurance industry, the new government has its task cut out

The global economy is slowly strengthening with global GDP growth estimated to rise to 3.5-4% in 2014. However, it will be interesting to see how the markets pan out over the next 6-12 months. Post the financial crisis, central banks had acted in a coordinated manner moving towards an easing policy.

Now the four major central banks—the Fed, Bank of England, ECB and the Bank of Japan—are likely to show policy divergences. The Fed and BoE are expected to slowly start raising interest rates, while the ECB and Bank of Japan are likely to continue easing. One is going to see increased activity and volatility in the currency and bond markets.

There is one worrying trend seen across big global banks. Now most global banks compete fiercely on league table rankings. There’s a new league table for banks—it is rankings based on the fines and settlements paid! Since 2009, about 20 global banks have paid fines in excess of $100 billion to the US authorities. These fines have been for misselling, anti-money laundering violations, fraud and other compliance violations. Banks are doing the maximum amount of hiring for compliance and legal. JP Morgan, which has paid more than $25 billion in fines, has recently hired 13,000 new employees for regulatory compliance! Globally, there is a huge regulatory upheaval due to increased vigil. The other concern has been the growth of shadow banking. Many say that the future financial crisis lies in shadow banking in emerging markets. The definition of shadow banking is still debatable. Some define it as lending by institutions other than banks, and this comprises a quarter of the global financial system or an estimated $71 trillion. China has long been identified as a hotspot for shadow banking, but the Chinese government has enough of resources to bail out the system. Nonetheless, globally regulatory authorities are still grappling with the rapid growth of shadow banking.

A lot of regulatory arbitrage happens because of shadow banking. In fact, increased compliances and high capital requirements are also some of the reasons why shadow banking is getting larger. As far as the Indian banking system is concerned, there are many key issues that are being widely discussed in the recent period.

First is the issue on non-performing loans (NPAs). Yes, it is a crucial problem, but I have come across various media reports that have grossly exaggerated this, saying that real NPAs are almost double

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