Commercial Banking PPT
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RAGHURAM RAJAN COMMITTEE REPORT ON FINANCIAL SECTOR REFORMSPresented by: GROUP: 06
Honorary economic adviser to Prime Minister Manmohan Singh
Macroeconomic Framework and financial sector development High growth, moderate inflation, absence of major turbulence(target of 9% growth,07-12)
Economy faces major challenges in maintaining high growth & moderate inflation
Sustainability of this growth process depends on its being inclusive & remaining non-inflationary
Some basic question(Due to recent painful surge in inflation) Is the present monetary policy right for stabilizing inflation expectation over 2-3 years
Is policy framework adapted able to cope up with the practical realities on the ground.
Sophistication and complexity of financial markets can be or should be unwounded
How do macroeconomic policies fit in to the game plan for financial sector reforms
Answer is. Disciplined and predictable monetary, fiscal and debt management policies constitute the crucial foundation for further progress
A well-functioning financial system is essential for macroeconomic stability, and can be particularly helpful in reducing the secondary effects of various shocks that inevitably hit any economy
How macroeconomic policy can influence the evolution of the financial sector Challenges from capital inflows(inflow quadrupled) In 200607, net capital inflows amounted to 45 billion US dollars(equivalent to nearly 5 per cent of Indias GDP) These inflows far exceed the current account deficit, which was 10 billion dollars Eased of in 2008-09 mainly due to turmoil in international financial markets Monetary and forex rate are equally related to the increased scale of gross inflows and outflows
Confidence in India remains strong It would therefore be prudent to adapt the financial system to larger inflows than in the past
It would also be wise to be prepared for a larger outflow of funds if either domestic or global circumstances were to deteriorate
Current account deficit makes it vulnerable to a sudden stop of inflows, although the level of foreign currency reserves does provide a cushion
In Nutshell There are no correct or ideal solutions for managing the integration of a large domestic financial system into the global economy
mistakes can be both large and harsh
What is clear is there is a premium on consistency, clarity, credibility and continuity of policies
Challenges capital inflow result in home currency
Main issue is how to handle exchange rate? Higher earnings in more non traded goods appreciation of real exchange rate creates imbalance b/w sector will cause
Govt budget deficit as well as capital inflow demand and supply
causing real exchange rate to appreciate
Countering real appreciation pressures Slow down productivity growth
Restraining private consumption(key-fiscal policy)
limiting net inflows could help slow appreciation pressures. capital control(not a sensible approach) encourage domestic capital to flow out .Buy companies abroad .Individual investment abroad
Motto of monetary policy Recommends Price stability(stable inflation) It will :Stabilize GDP growth Help house hold & firms make long term plans Increase investment
Capital Account LiberalizationOpening up to foreign banks and other financial firms and to foreign direct investment in the financial sector has many potential benefits Introduction of financial innovations and sophisticated financial instruments by foreign financial firms Depth in domestic financial markets due to foreign inflows More efficiency in the domestic banking sector through increased competition
LEVELLING THE PLAYING FIELD
Anyone can offer financial services as long as he can compete with the others. In an efficient financial system, the playing field is level Privileges Resources allocated efficiently Maximum out of productive resources
Challenge to level fields in India Privileges given to certain firms namely public sector.
Social Obligations for Banks in India: Lending to Priority sector Meeting prudential norms Statutory liquidity ratio Funding the government
Let competition decide Steadily lowering privileges, obligations and regulations for the most efficient form to prevail.
Neutral Institutional Ownership: Removing the overlay of costs & benefits imposed by Govt. ownership.
Welcoming Foreign Financial Firms Equalization by removing burdens. Should be given time to adjust. Financial Integration. Check on the misuse of their freedom of activity.
Deficiencies in the Banking System Smaller role relative to GDP. Largest Indian Bank (SBI) is relatively small. India ranked at 102, by the share of the top there banks in total banking assets. India doesn't have many small private banks. Foreign banks earning more profits.
Average spread exceeds 5% Less use of technology to reduce transaction costs. Fundamental differences between the new private sector and foreign banks; and public sector and old private sector banks.
Proposals Proposal 1: Reforming the public sector banks: To free the public sector banks from factors that cripple their ability to compete The major steps include: Create stronger boards of PSBs Delink banks from the government
Proposal 2: Encourage, but don't force, consolidation. To improve variety and efficiency in the banking sector specifically, and in the financial sector more generally. Takeovers of PSB Takeovers by private banks and eligible financial institutions Takeovers by large Indian banks
Proposal 3: Reduce barriers to competition: To reduce the overlay of obligations and benefits on the banking sector as a whole
Proposal 4: Moving to holding company structure To allow for a more effective provision of products that cut across financial activities.