Household financial savings have slid from a record high of 12.0 per cent of GDP in 2009-10 to 7.1 per cent of GDP in 2012-13. This decline is largely a result of negative returns on bank deposits after adjusting for structurally high retail inflation since 2011. Further, the inherent cultural appetite for gold in India along with its feature of being a natural hedge against inflation, has diverted a substantial part of retail savings into gold.

Channelisation of retail savings into the banking sector will require an out-of-the-box multi-pronged approach. As such, I propose the following:

– Convert India Post into Postal Bank of India, a full-fledged commercial bank to leverage its rural penetration for greater financial inclusion.

– Align bank savings deposit rate with RBI’s target for CPI inflation, which is currently 8 per cent for Jan-15, and 6 per cent for Jan-16. This will discourage lazy banking and incentivise banks to pass on positive real rates of return on bank deposits.

– Form an apex body, such as a Gold Bank, which, with the support of the banking system, can effectively postpone the immediate need for imported gold, and also help in the partial conversion of existing stock of physical gold into standardised form of e-gold, by the banking system.

Improving Efficiency and Productivity

Greater efficiency in banking operations will ensure that the cost of financial intermediation is minimised. Improvement in productivity, efficiency, and the resultant decline in the cost of providing financial services will help in furthering financial inclusion. In this context, there is a need for:

– Setting up a Bank Investment Company: It can act as a core investment committee under the MOF to hold equity shares in PSU banks. Such a framework has been successfully implemented in Singapore and UK. The envisaged BIC will empower decision-making in PSU banks, and enhance governance and administrative quality, especially with respect to human capital. This should be accompanied by a comprehensive review of Banks’ Boards, risk approval authorities, sector specialisations in banks, carving out the CMD positions into Non-Executive and MD & CEO akin to the management success of the private sector banks.

– Consolidation in Banking: As per the recommendations of the Narasimhan Committee, policymakers should encourage consolidation in banking to drive economies of scale and scope through diversification in geography and products. This will also promote pooling of skilled human resources, currently an imperative, and enhance operational efficiency and risk absorption capacity of banks.

– Improving Monetary Policy Transmission Mechanism: Consistent with the recommendations of the Urjit Patel Committee, the policymakers need to move away from an administrative setting of prices and phase out tax-free bonds, as it distorts the yield curve and comes with a fiscal burden. More importantly, statutory preemption in the form of SLR needs to be reduced further (to 15 per cent) in consonance with the road-map for fiscal consolidation (3 per cent deficit target) and requirements of the liquidity coverage ratio prescribed under the Basel III framework.

– Migrating from Core Banking to Door-Step Banking to Virtual Banking : Banking technology is poised to make a big leap in the near future, towards integrating customer data across banking platforms, facilitating trading in a more secure manner, developing virtual desktops and private clouds for centralised information, enabling speedier transaction processing and faster settlements. Banks need to implement robust IT architecture and should harness the power of information for business development. Besides, a strong IT system will also aid in adopting better risk management practices.

Ensuring Availability of Capital

For supporting credit off-take to productive sectors of the economy, banks’ requirements of capital will be of paramount importance. In this context, the policymakers need to move forward in ensuring that the demand for capital is met through regulatory and structural changes.

Instead of the ad-hoc nature of annual budgetary provisioning, there is an urgent need to lay a roadmap with a 5-year vision plan for the recapitalisation of PSU banks, which would require over Rs 3.5 lakh crore by 2017-18.

All good quality banks, irrespective of their size and vintage, should be considered eligible for expanding their branch banking services outside India. In this context, gradual liberalisation can be considered by encouraging banks to channelise their overseas operations towards liability generation, with limited restricted lending e.g. DIFC in UAE. Fundamentally, such branches could operate as Wholesale Branches focused on mobilising long term liabilities.

Currently, Indian banks without foreign branches/subsidiaries are subject to Withholding Tax on the interest payment, which can be as high as 20per cent, thus impacting the net landed rupee cost. The External Commercial Borrowings, however, are subject to uniform WHT rate of 5 per cent. In this context, this gap may be bridged, thereby making the foreign borrowings more cost competitive.

In order to create wider equity access, the policymakers should allow FDI/FII fungibility (within the stated cap of 74 per cent) for investment in banks, relax the limit on PE investment in banks from 5 per cent to 10-15 per cent (with adequate restrictions on voting rights) reduce volatility, and increase LIC’s investment limit in banks from 10 per cent to 15-20 per cent. These measures will also help in reducing the reliance on FIIs for equity capital and thereby curb market related volatility in the short term.

Infra Financing: The Next Wave of Growth

In order to boost growth, the NDA Government, in its maiden budget, rightly accorded a focused attention to the infrastructure sector. As such, announcement of new infrastructure projects such as 16 new ports, ultramodern coal power plants, new airports in tier-II cities, North- East highways along with Smart Cities, was adroitly balanced by incentives for Banks to raise long term funds for infrastructure financing along with flexible restructuring of infra loans.

As such, quick on the heels of the Finance Minister’s budget announcement, RBI issued detailed guidelines – allowing Banks to structure infrastructure loans for up to 25 years with refinancing every 5 years on fresh terms. Further, it has allowed Banks to raise long-term bonds to finance infrastructure projects with preemption from CRR and SLR requirements. From a banker’s perspective, while this implies a reduced cost of funds for the Banks (which will be passed on to end-consumers eventually), it also stands to correct their Asset-Liability mismatches. Further, by allowing flexible refinancing, the measure stands to reduce default and restructuring risks, along with an improvement in debt-service coverage ratio of infrastructure companies. With this two-pronged strategy, the Government and RBI have addressed the need to prop up infra-financing while protecting Bank’s from a further deterioration in asset-liability mismatches. Having said so, for infra-financing to take-off in the true sense, it will require additional support from the Government to ensure exogenous factors such as delayed business approvals, environmental and forestry clearances, are hastened to ensure minimal delays in project completion.

Facilitating Credit Availability for Other Key Sectors

Norms regarding acquisition of large sized stalled domestic infrastructure projects by experienced players can be relaxed (with suitable safeguards like a minimum lock-in) to support cape and financing from domestic banks.

CRR/SLR applicability on overseas borrowings for PCFC funding may be done away with, to enable more cost-effective availability of funds to exporters.

SUUTI stake-sale by the government in these blue-chip companies, offers a route to raise critical resources and aid fiscal consolidation.

Take-out financing for infrastructure projects could be incentivized by allowing reasonable compensation to Banks when they give up a good asset after the project is completed.


It is imperative to turn banking sector reforms into an ongoing process rather than an episode, as these reforms can add significantly to India’s long term growth potential. With the economic cycle now expected to turn, policymakers must focus on a comprehensive review of the banking sector’s needs and institutional infrastructure for achieving them.