Distinguished guests, Ladies and Gentlemen,
It is indeed a pleasure and privilege to be
amidst this august gathering of eminent bankers, experts and policymakers. Over
the years, the Conference has evolved as an important forum for structured information
sharing among not only delegates from the banking sector, but also experts from
research institutions, credit rating agencies, international institutions and
other financial sector bodies. The Bankers’ Conference, 2004 is a great
advancement over the previous years. The most notable feature is that Respected
President Dr. A.P.J. Abdul Kalam is addressing this gathering. In addition,
we also have here today, globally renowned policy makers amidst us who will
give us the benefit of their views. These include, Ms. Anne Krueger, First Managing
Director of the IMF, a dear friend of mine, and a distinguished Central Banker,
Governor Caruana of Bank of Spain who is also Chairman of the Basel Committee
on Banking Supervision.
The subjects selected for the Conference are
of great importance and we, in RBI, look forward to the benefit of your deliberations.
My inaugural address today will be brief and in the nature of a few comments
on the status of Indian banking industry and challenges ahead in a global perspective.
I. Status of Indian Banking Industry
It is useful to note some telling facts about
the status of the Indian banking industry juxtaposed with other countries, recognising
the differences between the developed and the emerging economies.
First, the structure of the industry :
In the world’s top 1000 banks, there are many more large and medium-sized domestic
banks from the developed countries than from the emerging economies. Illustratively,
according to The Banker 2004, out of the top 1000 banks globally, over
200 are located in USA, just above 100 in Japan, over 80 in Germany, over 40
in Spain and around 40 in the UK. Even China has as many as 16 banks within
the top 1000, out of which, as many as 14 are in the top 500. India, on the
other hand, had 20 banks within the top 1000 out of which only 6 were within
the top 500 banks. This is perhaps reflective of differences in size of economies
and of the financial sectors.
Second, the share of bank assets in the
aggregate financial sector assets : In most emerging markets, banking sector
assets comprise well over 80 per cent of total financial sector assets, whereas
these figures are much lower in the developed economies. Furthermore, deposits
as a share of total bank liabilities have declined since 1990 in many developed
countries, while in developing countries public deposits continue to be dominant
in banks. In India, the share of banking assets in total financial sector assets
is around 75 per cent, as of end-March 2004. There is, no doubt, merit in recognising
the importance of diversification in the institutional and instrument-specific
aspects of financial intermediation in the interests of wider choice, competition
and stability. However, the dominant role of banks in financial intermediation
in emerging economies and particularly in India, will continue in the medium-term;
and the banks will continue to be "special" for a long time. In this
regard, it is useful to emphasise the dominance of banks in the developing countries
in promoting non-bank financial intermediaries and services including in development
of debt-markets. Even where role of banks is apparently diminishing in emerging
markets, substantively, they continue to play a leading role in non-banking
financing activities, including the development of financial markets.
Third, internationalisation of banking
operations : The foreign controlled banking assets, as a proportion of total
domestic banking assets, increased significantly in several European countries
(Austria, Ireland, Spain, Germany and Nordic countries), but increases have
been fairly small in some others (UK and Switzerland). Amongst the emerging
economies, while there was marked increase of foreign-controlled ownership in
several Latin American economies, the increase has, at best, been modest in
the Asian economies. Available evidence seems to indicate some correlation between
the extent of liberalisation of capital account in the emerging markets and
the share of assets controlled by foreign banks. As per the evidence available,
the foreign banks in India, which are present in the form of branches, seem
to enjoy greater freedom in their operations, including retail banking, in the
country on par with domestic banks, as compared with most of the other developing
countries. Furthermore, the profitability of their operations in India is considerably
higher than that of the domestically-owned banks and, in fact, is higher than
the foreign banks’ operations in most other developing countries. India continues
to grant branch licences more liberally than the commitments made to the WTO.
Fourth, the share of state-owned banks
in total banking sector assets : Emerging economies, with predominantly Government-owned
banks, tend to have much higher state-ownership of banks compared to their developed
counterparts. While many emerging countries chose to privatise their public
sector banking industry after a process of absorption of the overhang problems
by the Government, we have encouraged state-run banks to diversify ownership
by inducting private share capital through public offerings rather than by strategic
sales and still absorb the overhang problems. The process has helped reduce
the burden on the Government, enhance transparency, encourage market discipline
and improve efficiency as reflected in stock market valuation, promote efficient
new private sector banks, while drastically reducing the share of the wholly
government owned public sector banks in a rapidly growing industry. Our successful
reform of public sector banks is a good example of a dynamic mix of public and
private ownership in banks.
A noteworthy feature of banking reforms in India
is the growth of newly licensed private sector banks, some of which have attained
globally best standards in terms of technology, services and sophistication.
In many respects related to performance, these domestically promoted banks have
surpassed branches of foreign banks in India, and could be a role model for
other banks.
II. Challenges Ahead
Let me highlight some thoughts on certain areas
which have a key bearing on the ability of Indian banks to remain competitive
and enhance soundness. Needless to state, these are more in the nature of random
thoughts, rather than any structured thinking, and are meant to invite discussion.
First, cost management. Cost containment
is a key to sustainability of bank profits as well as their long-term viability.
To highlight this point, let me, take recourse to some figures. In 2003, operating
costs of banks as a proportion of total average assets in the UK were 2.12 per
cent, for those in Switzerland they were 2.03 per cent, and less than 2 per
cent in major European economies like Sweden, Austria, Germany and France. In
India, however, in 2003, operating costs as proportion of total assets of scheduled
commercial banks stood at 2.24 per cent. The tasks ahead are thus clear and
within reach.
Second, recovery management. This is
a key to the stability of the banking sector. There should be no hesitation
in stating that Indian banks have done a remarkable job in containment of non-performing
loans (NPL) considering the overhang issues and overall difficult environment.
Let me add that for 2004, the net NPL ratio for the Indian scheduled commercial
banks at 2.9 per cent is ample testimony to the impressive efforts being made
by our banking system. In fact, recovery management is also linked to the banks’
interest margins. We must recognise that cost and recovery management supported
by enabling legal framework hold the key to future health and competitiveness
of the Indian banks. No doubt, improving recovery-management in India is an
area requiring expeditious and effective actions in legal, institutional and
judicial processes.
Third, technological intensity of banking:
This is one area where perhaps India needs to do significant ‘catching up’,
notwithstanding the rapid strides made over the last few years, though data
on this score are difficult to come by. Some available figures indicate that
in late 1999, the percentage of customers using online banking was less than
1 per cent in India, compared with anywhere between 6-30 per cent in developed
economies like US, UK, Germany, Finland and Sweden. Even in Latin America, these
figures are much higher than for India. While admittedly the numbers for India
are likely to be much higher at present than these figures suggest, so would
be the case for these other economies as well. The issue, therefore, remains
what has been the extent of ‘catching up’ by India on this score? In fact, this
seems somewhat intriguing: India happens to be a world leader in information
technology, but its usage by our banking system is somewhat muted. It is wise
for Indian banks to exploit this globally state-of-art expertise, domestically
available, to their fullest advantage.
Fourth, risk management. Banking in modern
economies is all about risk management. The successful negotiation and implementation
of Basel II Accord is likely to lead to an even sharper focus on the risk measurement
and risk management at the institutional level. Thankfully, the Basel Committee
has, through its various publications, provided useful guidelines on managing
the various facets of risk. The institution of sound risk management practices
would be an important pillar for staying ahead of the competition. Banks can,
on their part, formulate ‘early warning indicators’ suited to their own requirements,
business profile and risk appetite in order to better monitor and manage risks.
Fifth, governance. The recent irregularities
involving accounting firms in the US have amply demonstrated the importance
of good corporate governance practices. The quality of corporate governance
in the banks becomes critical as competition intensifies, banks strive to retain
their client base, and regulators move out of controls and micro-regulation.
As already mentioned, banks are special in emerging markets since they take
a leading role in development of other financial intermediaries and of financial
markets, apart from having a large recourse to public deposits. No doubt, there
is nothing like an ‘optimal’ level of governance for one to be satisfied with.
The objective should be to continuously strive for excellence. The RBI has,
on its part, made significant efforts to improve governance practices in banks,
drawing upon international best practices. It is heartening to note that corporate
governance presently finds explicit mention in the annual reports of several
banks. The improved corporate governance practice would also provide an opportunity
to accord greater freedom to the banks’ boards and move away from micro regulation
to macro management. Banks in India are custodians of depositors’ monies, monies
of the millions of depositors who are seeking safe avenues for their hard earned
savings, and hence, banks must accept and perform an effective fiduciary role.
In this light, improvement in policy-framework, regulatory regime, market-perceptions,
and indeed, popular sentiments relating to governance in banks need to be on
the top of the agenda – to serve our society’s needs and realities while being
in harmony with the global perspective.
Thank you.
Inaugural Address by Dr.Y.Venugopal Reddy, Governor, RBI at Bankers' Conference, 2004 on November 10,2004 at New Delhi