According to the RBI Governor, wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create
The Reserve Bank of India (RBI) Governor Dr Raghuram Rajan has said the current stress in the banking system suggests that the real economy will not wait for the banking system, and a slow pace of reform could lead to greater, rather than lower risk residing in the banking system.
"Financial sector reforms need to move on many fronts," Dr Rajan said in his overview that came with the RBI's Annual Report for 2014-15. "For a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk. Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create. The Chinese term this ‘Crossing the river by feeling the stones’. It is an appropriate metaphor to guide our own reforms," he added.
According to the RBI Governor, a regulatory view, fashionable in the past, was that the pace of regulatory reforms had to be limited by the capacity of our banks, especially our public sector banks (PSBs). "At the same time," he said, "we should recognise that PSBs undertake public interest activities (like the rollout of accounts under the Pradhan Mantri Jan Dhan Yojana) that are not always fully compensated. Government should endeavour to keep the competitive playing field level by fully compensating banks for activities it wants undertaken in the public interest."
High home price hindering genuine buyers: Earlier, Dr Rajan, while talking about housing market in India had said that there are numerous unsold properties because of astronomical property prices and urged property developers to reduce prices for the unsold properties to find takers.
The views of Dr Rajan also reflected in the RBI's Annual Report. It says genuine homebuyers have moved away from the housing market due to higher prices and investors stayed away due to the weakening state of the economy.
"The demand for residential properties has slowed down in recent times and unsold stock of residential homes has increased considerably at the same time. As the economic growth has started to take-off, the overall buyer sentiment is expected to rise. Presumably, developers are counting on this to happen and hence holding the price," the report added.
According to the RBI's annual report, quarterly growth in Housing Price Index (HPI) moved up in the first three quarters of 2014-15, as against a similar period in 2013-14, and there was a moderate pickup in house price growth, particularly in Delhi and Kolkata.
Dr Rajan in his overview also touched upon various issues pertaining to financial inclusion, non-performing assets, banking consumer issues, priority sector lending and competition.
Talking about financial inclusion and banking consumer issues, the RBI Governor said, "Financial inclusion also means greater consumer protection for the newly included and typically unsophisticated customers, an easily accessed and speedy grievance redressal process, and expanded efforts on financial literacy."
Banking Consumer Rights: "Following public consultation, RBI has developed a Charter of Consumer Rights. Bank boards have been asked to put in place frameworks that ensure those rights are protected. After those frameworks have been in operation for some time, RBI will take a view on best practices, and needed regulation, if any. In the meantime, field visits by RBI, to check mis-selling as well as proper functioning of bank infrastructure such as branches and ATMs, will be expanded," he said.
Internal Ombudsman System in Banks: "RBI is reviewing its Banking Ombudsman system to see how it can be extended to nonbanks and how it can be more effective in rural areas," Dr Rajan said, adding, "Each bank has also been asked to set up an internal Ombudsman system, which will examine the bank’s grievance cases to see if resolution is possible before it is escalated to RBI’s ombudsman system."
Financial Literacy: According to the RBI Governor financial literacy, whether through courses in schools, through literacy camps organised by banks and RBI, or through newspaper or social media campaigns, is extremely important. He said, "All too often, unscrupulous operators have discovered that greed trumps education – even the sophisticated fail to apply the maxim that if it is too good to be true, it probably is… Nevertheless, it is our duty to try and educate our public and we have to be better than the unscrupulous at exploiting new technologies, including mass and social media, to reach them. RBI intends to increase its focus on such campaigns significantly."
Priority Sector Lending: Dr Rajan said, priority sector activities have to be carried out by banks as part of their normal business operations and, therefore, banks are expected not to view this as a Corporate Social Responsibility. "On the part of the Reserve Bank, one important facilitation in this regard has been that pricing of all credit has been made free, though with the expectation that pricing should not be exploitative. Priority sector efforts will not be successful unless market players are willing to take risks by innovating structures, products and processes," he said.
Priority sector in India pertains to those sectors of the economy, which, though viable and creditworthy, may not get timely and adequate credit in the absence of any special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low-income groups and weaker sections. In the context of India, such sectors are spread across the length and breadth of the country and especially prevalent in the hilly and coastal regions.
Effective usage of land as collateral: "We also need to ease lending to small producers, whether they are farmers, Self Help Groups, or businesses," the RBI Governor said, adding, "For this, we need to improve the structure and working of credit information bureaus, collateral registries, and debt recovery tribunals – ironically, credit flows easily only when the lender is persuaded that he will get his money back, so easier access to credit necessitates closer attention to default prevention mechanism. Perhaps the most important source of collateral value is land. We need better digital mapping and clean records of land ownership across the country so that it can be used more effectively as collateral."
Efficiency through greater entry and competition: Mentioning that India need to increase efficiency in financial sector through efficiency through greater entry and competition, Dr Rajan said, "The most appropriate institutions will prevail when the competitive arena is level, so we have to remove regulatory privileges as well as impediments wherever possible, especially those that are biased towards some form of ownership or some particular institutional form."
"We need more participation in our financial markets to increase their size, depth, and liquidity. Participation is best enhanced not through subventions and subsidies but by creating supporting frameworks that improve transparency, contract enforcement, and protections for market participants against abusive practices. Technology can be very helpful in reducing the costs of supportive frameworks, and can bring hitherto excluded populations into the financial fold. It is these ideas that guide our medium-term reform strategy," the RBI Governor added.