FINANCE MINISTER’S SPEECH - SIR SORABJI POCHKHANAWALA MEMORIAL LECTURE 2011

Shri S Sridhar, Chairman & Managing Director

Central Bank of India

Members of the Central Bank family,

Ladies and Gentlemen

I am very happy to be here today for the Sir Sorabji Pochkhanawala Memorial Lecture 2011, which is part of the Centenary celebrations of  Central Bank of India.   Let me start by congratulating you all on the important milestone that your Bank has achieved.  It is creditable for any organization, more so for an organization, which was established during the pre-independence period of our country.

I have not had the opportunity of knowing Sir Sorabji Pochkhanawala, but I am aware of his stellar contribution to Indian Banking. He came from a modest background and had the rare vision and belief in India’s destiny. It made him think big and led to the setting up of the Central Bank of India.  He ran the Bank with great distinction exhibiting a pragmatic and an innovative approach.  It is remarkable that this was at a time when the country was still under the colonial rule.  Having a vision and nursing that vision into reality required immense courage in those times.  It speaks of the sagacity of Sir Sorabji.

The seed he planted has grown into a vast tree with over 3650 branches all over the country. I have been told that the Bank has decided to have a branch in every single district of the country, as the Centenary Year of the Bank comes to a close, by the end of 2011.

Following the global financial crisis and one of the deepest economic downturns that the world has witnessed in recent times, we are compelled to rethink some of our principles of economic and financial policy making.  The global developments underscore the importance of understanding and regulating the financial markets and the innovative financial products in the interest of sustaining growth and development.  We have seen how unfettered growth of financial sector can have dangerous implications for the real sector, both in the developed and the developing world.  There is much that we need to know about their functioning, the best practices that underpin the creation of new financial products and the related oversight issues so as to promote financial stability.

Ladies and Gentlemen,

We have been more fortunate in surviving the crisis without major disruptions and have recovered our growth momentum much faster than most others.

In the fiscal year 2010-11 the Indian economy is expected to record a GDP growth of 8.6 per cent which takes us back on the high growth path that the economy was traversing on in the years prior to the crisis.  This resilience that India has demonstrated in recent times reflects a maturing of the economic management of the country and the growing competitiveness of our enterprise.  This has happened even as the economy has become more integrated with global markets.  It shows that globalization and economic resilience can go hand in hand.

In the post-crisis period, financial stability and the banking system has become an integral part of policy discussions and macroeconomic objectives in the developed and the developing world.  A sound and resilient banking sector, well-functioning financial markets, robust liquidity management and payment and settlement infrastructure are the prerequisites for financial stability.

The fact that India has not gone through any financial turbulence, as a result of the earlier phase of financial deregulation is a testimony to our consistent view that reforms in global standards have to be adapted to local conditions.  Today, it is well established that our commercial banks are well regulated, vibrant, fast growing and match the global best practices in capital adequacy, risk management and business growth. 

Our Banks are doing a commendable job in meeting vast banking and credit requirements of an economy growing at close to 9 per cent in the last few years. I have said this before, for the economy to sustain a high growth rate, the support of the banking sector is imperative.

The Public Sector banks have played a very important role in economic growth of the country.  They constitute over 72 per cent of the banking sector assets in the country.  While they are expected to improve their outreach and scalability for sustaining high growth of the economy, they are second to none in retail banking practices and profitability.

There are however, several concerns that need to be fully addressed.  The cost of banking intermediaries in India is high and bank penetration is limited to only a few customer segments and geographies.  We are trying to address this in collaboration with the Reserve Bank of India and with the active participation of the banking and non-banking financial entities.

Ladies and Gentlemen,

Financial inclusion is a key determinant of sustainable and inclusive growth, which in turn is essential for building an equitable society.  We have accorded high importance to financial inclusion to cover the entire gamut of financial services pertaining to savings, credit, insurance and transfers.  A major unfinished, in some sense on-going, task in this context is to promote greater financial literacy and investor protection.

Though over the last few decades most of the financial sector policies sought to accelerate the penetration of the banking and financial services, the goal of universal coverage is yet to be achieved.  In the pursuit of this objective many bank branches were set up, particularly in the rural areas of the country. Regional rural banks came into existence to give saving facilities to the people.  Credit assistance was given to agriculture by cooperative banks and meticulous efforts were put in to ensure that institutional finance was accessible to the large section of society.  The nationalization of banks in 1969 have boost to expansion of banking network in the country.   However, as I said, the outcomes of these efforts are yet to show the desired results. Newer perspectives and approaches towards financial inclusion are the need of the hour. There is a case for the policy makers and other stake holders to re-strategize the financial policies that are meant to reach the un-reached and the unbanked sections of our country.

In my last budget speech 2010-11, I had advised Banks to provide banking facilities to habitations having a population of over 2000 by March 2012.   The Banks have identified about 73000 such habitations for providing banking facilities using appropriate technologies.  A multi-media campaign, “Swabhimaan”, has been launched to inform, educate and motivate people to open bank accounts.  During the current financial year, banks will cover 20000 villages.  The remaining will be covered during 2011-12.  The Swabhimaan Campaign will help in providing the basic services such as deposits, withdrawals and remittances using the services of Business Correspondents at the door steps of the targeted people.  This initiative will also enable the Government subsidies and social security benefits to be directly credited to the accounts of the beneficiaries.  I see Swabhimaan as a watershed in the evolution of Indian Banking.

As a part of the reforms in the financial sector in India, we have set up an apex-level Financial Stability and Development Council (FSDC), with a view to strengthen and institutionalize the mechanism for maintaining financial stability.  Without prejudice to the autonomy of market regulators, this Council would undertake macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues.  It would also focus on financial literacy and financial inclusion.  We have also set up a Financial Sector Legislative Reforms Commission (FSLRC), which will have its first meeting in the coming days to rewrite and clean up the financial sector laws and bring them in line with the requirements of the sector.

We are well aware of the capital constraints faced by the Public Sector Banks.  To address these, we have provided a sum of over Rs.20,000 crore towards recapitalization of public sector banks during the financial year 2010-11.

An additional amount of Rs. 6000 crore is also being provided for the financial year 2011-12.  This will enable the PSBs to meet the credit requirements of the growing economy.

As stakeholders striving for a common goal, we need to reflect upon possible flaws in our system and address them to withstand adversities.

 

We need to make our financial sector more competitive by enhancing efficiency and transparency.   While greater competition is welcome, we have to guard against the competitive race to the bottom. I hope this perspective will guide growth of the Central bank and the Indian banking system, in general, in the coming years.

Before I conclude let me thank you for inviting me to address this important function.  I wish you all and the Central bank the very best in your respective endeavour.

Thank you.

SOURCE: https://www.centralbankofindia.co.in/upload/news/FM_SPEECH1.pdf