Journalism of Courage
D Subbarao,governor,Reserve Bank of India (RBI),on Friday said banks would have to meet certain preconditions before the Statutory Liquidity Ratio (SLR) could be cut. He was speaking at the eighth annual convocation of the postgraduate programme in banking and finance of the National Institute of Bank Management (NIBM).
At present,Indian banks have a large amount in government debt holding because fiscal deficit is high. The prescribed Statutory Ratio ( SLR) is 24 per cent and banks need to reduce that and certain preconditions have to be met before this can be done, he said. There is a general perception that banking must go back to the basics,he said,referring to ICICI chairman KV Kamaths earlier remarks on issue at the same meet.
There are several ideas going around that banks are not boring nowadays,he said,referring to Thomas Krugmans theory that Banks must be made boring. There is a belief that whenever banks get too exciting,too adventurous and innovative,the banks financial stability is disturbed, he said.
He referred to the American banking system before 1930s during the great depression when banking attracted talent but this was soon followed by the period between 1930 and 1960 after World War II when banking got regulated and did not attract much talent from the market. After 1960 however,deregulation came in gradually and banking once again expanded,attracted people and became innovative,he pointed out.
So the question is,is making banking boring necessary and is it sufficient to prevent the recurrence of financial instability? If so then what is the cost of making banking boring? he asked.
You cannot make banks boring because you need to make banks innovative,you want banks to be imaginative and want managers to be responsive to the needs of the environment and the banking systems needs to keep up with the demands of the environment. So boring banks theory does not work anywhere in the world. It does not work in India as well. Indian banks have been in a much better position to deal with situations, he said.
He added that Indian banks need to face the challenge of financial inclusion since it is necessary to provide everybody with banking access. Financing infrastructure is another important area for which huge funds are required. The 12th Plan talks of $1 trillion to be put into infrastructure but in the banking sector,there is more that banking system can currently provide at the current levels.
Financing infrastructure is important because of the long term finance involved. Right now banks have a short term ending so there is naturally an asset liability mismatch to finance infrastructure. So all the banks and financial institutions are engaged in trying to identify innovative ways of financing infrastructure, he said.
