Mumbai, Nov 25 (Inditop.com) Inefficiencies in the banking system were not allowing customers to fully enjoy benefits of rate cuts, said the chief of India’s central bank here Wednesday.
“Although overall efficiency and productivity have improved, resources are not being utilised in the most efficient manner. There is a degree of stickiness and non-transparency in bank lending rates,” said Reserve Bank of India Governor Duvvuri Subbarao at a conference organised by the Indian Merchants Chamber.
“The challenge for Indian banks, therefore, is to reduce costs and pass on the benefits to both depositors and lenders. This will involve constantly reinventing business models and designing products and services demanded by a rapidly growing and diversifying economy,” he added.
The RBI governor also said a new regulation requiring banks to park certain portion of their funds as “contingent capital” was being discussed within the central bank, and a decision would be taken soon.
“This proposal will potentially require banks to issue long-term debt instruments that would automatically covert to equity under specific triggers,” Rao said.
“This contingent arrangement will accordingly enable banks coming under stress to quickly buffer their capital without imposing any cost on tax payers.”
He also said vast areas in rural India were still devoid of any kind of banking or financial institutional presence.
“Rough estimates indicate that of the 600,000 habitation centres in the country, only about 30,000 centres are covered by commercial banks. Even this big picture, stark as it is, does not fully convey the true extent of exclusion,” the RBI governor added.
Citing infrastructure financing as a major problem faced by banking institutions, he noted that the 11th Five-Year Plan has targeted an infrastructure investment growth from around 5 percent of GDP (gross domestic product) in 2006-07 to 9 percent by 2011-12.
“This translates into cumulative infrastructure investment over the plan period of over $520 billion,” Rao said.
“Almost one half of this investment is to be funded through debt, and as much as 43 percent of this total debt requirement (21 percent of overall planned investment) is planned to be financed by banks.”