De-politicise banking

CHENNAI, JAN 10: De-politicisation of banking would be a critical item on India's unfinished agenda of financial sector reforms, said M Nara...

CHENNAI, JAN 10: De-politicisation of banking would be a critical item on India8217;s unfinished agenda of financial sector reforms, said M Narasimham, chairman of the financial sector reforms committee, government of India, here today.

Speaking at the plenary session on Globalisation of financial services 8211; role of government8217; at the concluding day of the CII Partnership Summit here, Narasimham said, 8220;In improving asset quality, an important element is non-interference by authorities through directions with regard to credit operations of individual banks. Macro credit guidance is acceptable but micro credit direction should clearly be eschewed.8221; This, he said, was clearly related to the whole area of functional autonomy. 8220;The question of functional autonomy requires a change in attitude and in this context, the committee on the financial system CFS made an important recommendation with regard to de-politicisation of appointments. The importance of this can hardly be over-emphasised.8221;

The Indian banking system, he observed, was over-administered but under-regulated. Autonomy and regulation were not contradictory and the CFS was attempting to replace discretionary direction8217; with rule-bound and transparent regulation8217;, he said. Reiterating the importance of the morale of banking personnel in informed decision-making, Narasimham said, 8220;obviously, there is no such thing as riskless banking. Mistakes will be made8230;..but there is a need to distinguish between genuine commercial misjudgement and deliberate misfeasance.8221;

On other key issues that remained to be addressed in the second phase of banking reforms, he said there was scope for further reduction in non-performing asset NPA levels, which, at around 9 per cent presently, still concealed wide bank variations. Average net profitability of banks, as a result, had gone up significantly but was still not of an order to suggest full recovery, he said. 8220;The Tarapore committee indicated the possibility of adopting the narrow bank8217; concept in an effort to limit the spread of the deleterious effect of a high level of NPAs. This is a possible solution and requires careful consideration,8221; he said.

Banks also needed to speedily move towards streamlining operations and procedures, technology upgradation and instant electronic funds transfer system, he added.

8220;An important development in international banking is the revival of the phenomenon of universal banking. In this country also, we are moving towards this concept8221; said Narasimham. The CFS, he added, had suggested a structure where there would be two or three large national banks with an international character, about ten large national banks and the rest, regional or local banks. 8220;There is clearly need now to think further in this direction and take steps towards setting up two or three large banks,quot; he said.