Reserve Bank of India (RBI) governor Raghuram Rajan said on Friday the concept of a good bank and bad bank may not be relevant for India since much of the assets backing the banks’ loans are viable or can be made viable. Delivering the CK Prahlad memorial lecture, the governor observed that given most of the assets are viable, it would make sense for the banks themselves to recover the dues. The governor added that in cases where loans are not priced appropriately when transferred to the bad bank, it could create issues. “So let’s us just help the banks clean up their balance sheets,” Rajan said.
The central bank governor also assuaged concerns the entry of new niche lenders such as payments and small finance banks would create unfair competition saying these were unfounded as the playing field for both new entrants and incumbents was level.
“Incumbents have expressed fears about unfair competition. Competition is only unfair if it is not on the same playing field. In fact, new entrants have no privileges that incumbents do not already enjoy,” Rajan said.
In August, State Bank of India chairman Arundhati Bhattacharya had expressed concerns over intensified competition from these new entrants. Bhattacharya had cited that the deep pockets of the corporates and their reach could help them cannibalise bank deposits quickly. The banking system could see the entry of 21 new players over the next two years. Ten applicants received in-principle nod to set up small finance banks on Wednesday and 11 had got approval to set up payments banks earlier this month from the RBI. The winners of in-principle approval of payments banks are large corporates, such as telecom majors Vodafone and Airtel having massive reach in villages. In-principle approvals to set up small finance banks have largely been given to microfinance companies.
The RBI governor said he hopes new entrants shake up the banking system by introducing innovative ways to improve customer service and products. In his lecture, Rajan said the RBI, although conservative, is not averse to innovations. Highlighting some of the ease in norms that the RBI affected to bring in more flexibility to the markets, Rajan said that it would further liberalise rules once it is convinced that innovations do not pose immediate danger to the system.
Rajan cited that the central bank has allowed more participants in the derivatives market, especially “speculators” to deepen markets. However, he added that the RBI would ensure that speculators do not manipulate the market. “Speculators are much maligned in India and often confused with market manipulators. The two are different,” he said.
Over the last one year, the RBI has relaxed norms for trading currency derivatives and interest rate derivatives by allowing hedging through cross-currency options in addition to dollar/rupee options, allowing greater flexibility in cancelling and rebooking forward contracts and introduced cash settlement in exchange-traded interest rate futures.
Rajan also reiterated the need to deepen the corporate bond market and said that soon banks would be allowed to give credit enhancements to corporate bonds.