Next week, when Reserve Bank of India (RBI) governor, Dr Bimal Jalan, unveils the credit policy for the second half of 2002-03, he will be doing so against a considerably comfortable background as far as the apex bank is concerned. There are no real major external constraints which RBI has to worry about right now ? foreign exchange reserves are extremely comfortable and nudging the $70 billion mark, interest rates are at their softest, and inflation, though inching up, is still well within manageable limits. This credit policy therefore, most RBI insiders agree, provides an ideal opportunity for the country?s central bank to revisit some of the crucial structural issues and attempt to sort them out. To that extent, it may be important to focus on some of these relatively ?soft? issues which the RBI could address this time round.
The subject of corporate governance in the banking sector is one which, of late, has been attracting considerable attention, more so with a number of banks now listed on the stock exchanges. Just like any listed company, these listed banks too are accountable to the large body of their shareholders. In such a scenario, corporate governance plays a crucial role in the healthy functioning of these banking institutions. The role of the directors who sit on the boards of the banks and the quality of decision-making would be crucial in the context of enhancing shareholder value. Empowerment of shareholder-directors in these banks and an understanding of the industry would also be important for better governance in these institutions, something in which RBI may like to have a role to play as the banking regulator.
While there has been no official comment from the regulator about this, one does get the feeling that the central bank, despite being satisfied with the overall progress of the banking sector, is still concerned about some pockets of inefficiency. Among them clearly are certain private sector banks and a few state-run ones, where the quality of management still leaves a lot to be desired. With wobbly balance sheets and average managerial talent, some of these private sector banks need urgent attention, either by way of capital infusion or even a larger-scale restructuring. Some public sector banks, too, have to address their own set of problems, and depend less and less on government assistance. Unless these things happen, there will still be an inherent threat to the system posed by these less-than-healthy institutions.
Transaction costs is another area where the banks have some distance to travel. A further reduction in such costs is important in today?s highly competitive world of banking. Towards that end, banks would have to be further encouraged to close down inefficient branches and further reduce the number of unproductive staff, among other things. On the cash reserve ratio (CRR) front, RBI has already made it clear it remains committed to reducing CRR to the statutory minimum of 3 per cent. Signals emanating from Mint Road also suggest that the central bank may take this opportunity to examine some issues relating to the statutory liquidity ratio (SLR) and a package relating to SLR and its components can be expected.
The RBI is also keen that banks are transparent about the interest rates they charge. The apex bank?s earlier desire that banks stay within the band of 4 per cent over their prime lending rates is still not being fully followed, particularly by some larger private sector banks, RBI has found. The forthcoming credit policy may therefore see the central bank making it plain that banks should stay within this band. The banks may also be told once again to make public the maximum and minimum interest rates being charged to borrowers so that a menu of interest rates is available to them.
If RBI acts on even some of these structural issues by seizing this opportunity, this credit policy may well go down as one which paved a clear path for the future, rather than focus only on the present. As for providing a stimulus for growth, RBI surely can?t be blamed for not trying hard enough.