Friday, July 10, 2009

How do we reform Indian banking?

Pranab Mukherjee's budget disappointed reformists and it would have been particularly crushing for advocates of banking sector reform. Not even a token reference to the Raghuram Rajan committee report; on the contrary, Mukherjee jangled the nerves of commentators by hailing Indira Gandhi's nationalisation of banks.

Here again, reformers were being foolish if they expected 'big bang' moves- greater entry for foreign banks or dilution of government shareholding in public sector banks (PSBs) below 50%. No policy maker would like to stick his neck out on foreign banks in the wake of the financial crisis in which the biggest banks have been badly hit. And after Sonia Gandhi's stout defence of bank nationalisation a few months ago, no FM could even think of diluting social control of PSBs.

But, it's not as if banking sector reform only means things like the above. We need to find creative ways of encourage more domestic players without undermining domestic stability. Letting industrial houses into banking may not be advisable but we could tinker with private bank ownership norms so that lesser entrepreneurs can get in.

But, also, as I argue in my ET column, In banking, do what is doable, we have focus on improving governance and management at PSBs. Makes sense because the global economic reality and the domestic political reality together imply that PSBs will continue to dominate the Indian banking landscape in the foreseeable future.


Charlie said...

Upper and upper middle class Indians might feel the need for foreign banks, but the great majority of average Indians specially the middle and lower middle class, people in smaller towns and village certainly have no faith in foreign banks or infact even in private banks. Infact after the crisis which hit leading US and other big foreign banks, I know of a large number of people banking with foreign banks and infact even our own ICICI wanting to make a switch to government owned banks. With increasing IT spend and use of technology, the efficiency and productivity gap between government owned banks and other private has narrowed downed quite a bit. The only problem area for PSU banks is poor customer handling skills and speed which can be improved with better training. Finally banking is supposed to be a monotonous and boring job, it helps neither the customer and the bank if it starts becoming glamourous.

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