The coming year 2009 was to be a landmark year in India?s banking history when the sector would be opened up wider to foreign banks. It looks as if this will have to wait for some time, but the prospect of greater openness in future should prompt thinking on the steps required for preparing incumbent banks to meet increased competition. And this required agility will not emanate from prospective foreign banking competitors alone. Once the current slowdown in the credit cycle bottoms into the next growth cycle, many Indian corporates are likely to emerge even stronger and competitive in global business. They will require greater support from the banking sector with a wider range of financial products and greater access to global capital pools.
To match the complexity and risk profile of these products, a suitable range of risk management tools and solutions will be needed. Too many financial markets in India are now ?missing? and these will need to be bridged with a variety of appropriate products, spanning the bonds, currencies and derivatives markets (the so-called BCD nexus). From a policy point of view, an added benefit of more complete markets is a cross-flow in the formation of a liquid yield curve and thereby more efficient transmission mechanisms for monetary policy. These derivatives are also not just for corporates; they are as relevant for farmers (weather insurance), pensioners (risk management for provident funds) and other deposit products.
Access to financial services for all households in India is crucial if we want sustained and inclusive growth. Getting more people in the financial net translates into more business and opportunities for banks and is an incentive for banks. However, as past experience demonstrates, more innova-tive channels for reaching out need to be explored.
A critical component in the functioning of a more competitive and innovative financial landscape is effective financial oversight and regulation. There will be an understandable tendency, given the experience of the current financial crisis, to advocate more controls on banks as well as the markets through which banking products are offered. While there is indeed some merit in rethinking the appropriateness of the more complex financial structures, there is arguably a greater need now of introducing a variety of derivatives, to enable banks to hedge against risks in this volatile environment.
More generally, the mantra now ought to be ?better, not more, regulation?. What this means in practice needs to be debated and elaborated. One component will certainly be greater and appropriate disclosure, but in tandem greater operational flexibility to banks to determine and offer products and services might be considered. Given the increasing overlap of financial services offered by various classes of intermediaries, the case for introducing conditions for a more level playing field for banks and others is strong, although this might mean a concomitant increase of the degree of regulatory oversight on the non-bank entities.
(These are his personal views)