Interview: Raghuram Rajan plans ‘dramatic remaking’ of India’s banking system

November 18, 2013 10:54 am

Interview: Raghuram Rajan plans ‘dramatic remaking’ of India’s banking system

By James Crabtree, Lionel Barber and Victor Mallet in Mumbai

India’s central bank governor Raghuram Rajan is planning a “dramatic remaking” of banking in Asia’s third-largest economy, with an expanded role for foreign groups, more licences for domestic private sector institutions and a push to shake-up state-backed banks in advance of a new era of robust competition.The recently appointed Reserve Bank of India head this month published new rules liberalising the treatment of foreign banks and is planning to issue the country’s first new banking licences in a decade next year, part of far-reaching reforms for financial services sector in India.

“I see over the next few years a dramatic remaking of the banking landscape,” he told the Financial Times. “Both from the . . . new banks which are going to come on board, and the foreign banks which are going to be allowed to expand more freely. It will be a multiplier in terms of competition.”

International outfits such as Standard Chartered andHSBC account for only about 6 per cent of assets, but Mr Rajan says the RBI’s new rules provide a “huge” opportunity to grow by expanding into areas such as trade finance, and even to “take over Indian banks at some point”.

The RBI also plans to grant more regular licences for a broader range of financial institutions, providing what Mr Rajan describes as a “substantial change” to bank structures.

“We could have wholesale banks, we could have mobile [phone] companies doing some banking activities, within certain constraints. We could have small banks, which we currently don’t allow, and we could allow co-operative banks,” said Mr Rajan.

The measures are part of what could become one of the most far-reaching attempts to free India’s banks from the morass of state controls introduced after then prime minister Indira Gandhi nationalised many private banks in the late 1960s.

Over the past two decades the banking sector has been opened gradually to competition, with around a fifth of the country’s Rs96trn ($1.5trn) in bank assets last year being controlled by Indian private sector institutions.

We could have wholesale banks, we could have mobile [phone] companies doing some banking activities, within certain constraints

The RBI’s newly liberal approach is conditional on international banks setting up separately capitalised local subsidiaries, with the regulator in return promising to lift restrictions on their expansion, including previous strict limits on opening new retail branches.

In private, some foreign bankers express scepticism about the new regulations, which come with expensive obligations to lend to poorer customers, as part of a wider RBI’s attempt to bring financial services to India’s vast “unbanked” population.

But Mr Rajan plans to offer reassurances to foreign players about the costs involved in making the transition to the proposed new structure, saying: “I would like some of them to do it, and I think some of them will.”

The RBI also plans to overhaul rules relating to state-backed banks, which control roughly three-quarters of assets, partly by encouraging swifter recognition of bad corporate assets, which have hampered the financial system during India’s recent economic slowdown.

“I would like to see the public sector banks up their game, given the heightened competition [from the private sector],” Mr Rajan says. “We need to clean up the bad loans. But at the same time cleaning up bad loans shouldn’t be seen as a witch-hunt, where you are going after everybody and this country’s not open for business.”