Reserve Bank of India (RBI) governor YV Reddy has spelt out the broad road map for the next round of structural changes in the financial system. High among RBI?s list of priorities is the ?democratisation? of banking, which will essentially encourage the banking system to include those who were hitherto out of the organised financial sector. Financial inclusion?together with financial education and credit counselling, community banking and a variety of banking cultures to cater to the needs of the growing economy?figure in the RBI?s agenda.

In an interview with FE after he unveiled his mid-term review of the RBI Annual Policy 2007-08, Reddy also said the development of a vibrant corporate bond market?the ideal time for which was now?would hinge on broad-basing the number of intermediaries in the market, by including provident funds and insurance players.

Outlining the progress of the structural changes and what RBI felt were further steps required, Reddy said: ?My basic issue is going to be, with 10% growth or 9% growth, that a lot of poor people who have not been in the organised sector will come in, and you better take them in. The democratisation of the banking system is vital, not just provision of credit. The financial system, banking in particular, is like giving elementary school education. Therefore, the highest priority needs to be given to financial inclusion coupled with financial literacy and credit counselling.?

The RBI governor said there was ?reasonable enthusiasm? among banks on this count. ?Some banks publicise a lot, others don?t. If you don?t service them (the new entrants to the system), you?re missing an opportunity. We can incentivise the banks.? He said another initiative was community banking.

?There should be a variety of banking cultures to cater to this wide spectrum of economic activity taking place in the country. Even the concept of moneylenders may be relevant in some states. Big banks are also entering into agreements with post offices and using the postman to penetrate deeper,? Reddy said.

Underscoring that the Indian government?s securities market was among the best, Reddy said there was little merit in just creating a corporate debt market and making banks participate.

?The purpose of a corporate debt market is to diversify financial intermediaries. Diversification of financial intermediaries will happen when you have pension funds and insurance. Just because I want to develop the corporate debt market, I can?t go on saying let the banks take the money and, instead of directly giving to corporates, give it to the corporate debt market.?

He said the global experience has been that a good corporate debt market will develop when there was a good government securities market. Elaborating on his experience at a recent seminar where Latin American and Asian countries were exchanging notes on the subject, the governor said most of the countries were trying to develop the corporate debt market only over the past few years.

?We have a bank-dominated system, no provident funds, no insurance. Second, most of the savings are still taken by the government, directly or indirectly. And so, the government securities market accounts for nearly 80%. The domination has been government securities and we have now reached a maturity of 20-30 years for government securities, which was not there six years ago. In many other emerging market economies, they are still trying to push beyond five years. We have got a solid foundation of G-secs and the infrastructure. It is the ideal time now to move. The real development will come with pension funds and insurance.?

Reddy said the Indian forex market was well developed. ?On the derivatives side, we have a programme which should see through the next six months. Most of these will come into the public domain by March and I expect by May-June most of these things will be in place. We should be on solid ground then. We don?t want to get into the problem and then solve it. We?ll go slow and see there?s no problem.?

Calling public sector banks (PSBs) a ?different kettle of fish? owing to their ownership structure, Reddy said there, too, the central bank was pushing for even better risk management systems and technology. The RBI governor said capital raising for banks was not a big issue.

?Anybody now can raise big amounts of money. Rs 30,000-40,000 crore can be raised in our market easily now. Shares are doing well. However, on the banking system becoming more commercially savvy, some more improvement is possible.?