Time to reform

Several banks have cut lending rates recently, something that these columns have vigorously called for as necessary, both economically and politically. Still others, particularly Indian- and foreign-held private banks, are holding out. Several of those met the government8217;s secretary for financial services, Arun Ramanathan, on Wednesday, presumably to explain their reasons. We can at least guess what they are: they think they simply don8217;t have enough funds; that they still have to borrow at excessively high inter-bank lending rates on occasion, so rate cuts impact profitability hard; that new deposit growth will have stalled, because money8217;s moving from private to public banks 8212; the latter are seen as safer in these troubled times.

These are all reasons to which any sensible observer would be sympathetic. And yet the consensus 8212; inside and outside that meeting 8212; is that rate cuts are an overall necessity for this economy. The government has made it clear that it intends to keep flushing the market with liquidity, and that should ease some of the problems. The deeper malaise, of stagnating deposits and decreasing profitability, however, needs structural rather than temporary change. That8217;s where the April 2008 report of the High Level Committee on financial sector reforms comes in.

The Raghuram Rajan report 8212; known as such reports are by the name of their principal author 8212; might be politically difficult to implement in its entirety today. Trying to push for sophisticated instruments that use the collateralisation of corporate debt, however useful in theory, is doomed in this climate, for one. However, the report details how to expand access to credit, and particularly how to ensure that privately-owned banks increase rural lending. Those aspects can indeed be thought about at this point, and might well help sweeten the deal for banks being dragooned into a rate cut in the national interest. In an opinion piece written after the report was released, two of its authors, including its principal, said: 8220;little urgency for reforms because India is not in a crisis8221;. That was then. Now, perhaps the crisis that has brought Raghuram Rajan to the PMO can help bring his report to the villages of India.