Foreign banks will bring more innovation in priority sector lending space and fill the void left by the “inefficiency” of public sector banks, K. C. Chakrabarty, Deputy Governor, Reserve Bank of India, said.
“We think they will bring new products, new services and innovation. More innovation is required in agriculture and small and medium scale enterprises (SMEs) rather than in the derivatives markets,” he said at the 2nd FT-YES Bank International Banking Summit.
He added that public sector banks must introspect what has gone wrong. “Our public sector banks have been inefficient with respect to lending to the marginalised sections of the society. They have not been able to fill this gap for 40 years.”
He also rapped the foreign banks for not integrating enough with the economy.
Chakrabarty said that foreign banks have been in this country for over 100 years but they do not know the cost of a plough or a farm animal. “Perhaps, agriculture target must be assigned to them. Then they will know the cost of a plough and the cost of an animal.”
He said agriculture financing is a viable business opportunity for banks. Agriculture contributes about 16 per cent to the gross domestic product. However, this is a segment which does not have any access to (formal) finance. At least domestic financers must be able to allocate 11-12 per cent of their credit for agriculture, he added.
Speaking at the event, RBI Deputy Governor Anand Sinha said that monetary policy, fiscal policy and macro-prudential policy have to act in tandem.
Unless there is a specific compulsion, these policies have to act towards the same objective and in most of the situations in the same direction, he said at a banking summit organised by YES Bank.
The Deputy Governor’s comments come at a time when the Government, which has announced a host of reform measures in the last few weeks, is expecting complementary action (cut interest rates to spur growth) from the central bank.
The Government has announced a host of reform measures including liberalisation in foreign direct investment norms in the aviation, multi-brand retail, non-news broadcasting, insurance, and also cut down fuel subsidies.
The Reserve Bank of India’s second quarter review of monetary policy announcement is due on October 30.
Financial imbalances
Sinha observed that an overwhelming opinion is building up that monetary policy has to take into account the build-up of financial imbalances in the system.
“Financial imbalances build up over a much longer period of time than business cycles. And, therefore, one of the solutions being talked about is that monetary policy be formulated over a two-to-three year horizon.
“Opinion is also building up that monetary policy has a larger role than just inflation targeting,” said the Deputy Governor.
Sinha cautioned that if attention is not paid to financial imbalances then the transmission of monetary policy itself becomes impaired.
If the financial system is not operating in an optimal way there is no way monetary policy stimulus can have the desired effect.