H V Sheshadri
MD & CEO, Development Credit Bank
The fact that both the prime minister and the finance minister belong to the original band of reformists makes bankers hopeful that the Budget would continue to further reforms, especially in the field of banking.
We hope the Budget would be an anti-inflationary one. Inflation has already mounted to around 5.89 per cent and it can breach 6 per cent. While prices of commodities need to be brought down, it is imperative that the Budget borrowings be kept within acceptable numbers and in the region of 4.50 per cent of GDP.
This is critical since excessive borrowing to fund spending programmes could push up interest rates as well as crowd out the private sector requirements.
A hike in interest rates hurts banks substantially in the form of mark to market norms on securities portfolio. The banking system is sitting on an excess gilts portfolio and has booked a large amount of profits in the past few years.
In the intervening period, the portfolio duration has also lengthened as government issues last year were for longer durations and this increases depreciation risk on the portfolio.
As external capital flows into the stock market take a breather, we need to develop other sources. It would be worthwhile to ponder whether funding for development and agricultural sector could be availed of by a special float of overseas foreign currency long-term sovereign borrowing by the government or through a government body with sovereign guarantee. This would get cheaper funds while boosting liquidity and conserving local liquidity for private sector.
As a further step towards full convertibility, we could look forward to an increase in the amounts of foreign currency borrowings that banks can raise from abroad.
The current borrowing limits are so small that even small corporates can borrow more on their own and bypass the banking system. We need banks to be able to access long term liquidity at attractive prices in order to reduce cost to customers, especially to the export sector.
It is also time to reconcile the rates given by the government savings schemes and banks. Bank deposit costs can be pushed down substantially only when the government cuts its own savings rates.
May be it is time to evaluate whether even the government can offer differential schemes -- citizens below a cutoff salary or net worth or above a certain age getting current or even higher rates, but the rest of the better off citizens be given rates well below current rates.
One other factor to ponder over is whether regulatory stipulations on banks like SLR and priority sector norms can be reduced for banks while the shortfall is met by imposing some on insurance sector and to a certain extent mutual funds.
Today, all the three sectors are investing in corporate papers, but with no other regulatory costs, the other sectors are able to drive down the yields to very low levels, which hurts banks since their yields are not only lowered but other regulatory costs also add to the overall costs. A re-distribution would thus be fair.
It is true that the public sector banks have been given freedom but the government should create a level playing field for the domestic banks vis-a-vis foreign banks.
They should be permitted to offer VRS to their employees freely permitted and regulatory stipulations like priority sector lending and rural branches should be uniform for all banks.
Finally, consolidation and mergers should be actively encouraged in the banking system with appropriate fiscal incentives as banks prepare a tougher capital regime under Basel II norms.
Banking sector reforms should be continued, including foreign ownership of banks and voting right cap removal to facilitate foreign investments.
Pension reforms a must
Sunil Mehta
Country Head & CEO, AIG-India
The first Budget of the UPA government assumes significance as it will set the stage for future direction of economic reforms. While the Common Minimum Programme articulated broad policy directives, the Budget will provide form and shape to the economic agenda.
The strong economy affords the finance minister an opportunity to take forward reform measures. There are numerous areas in the financial services sector where reforms could further provide fillip for economic growth.
Financing infrastructure: Development of infrastructure will provide the backbone for sustainable economic growth. While the government will continue to play an important role in the financing of infrastructure, however, there needs to be more private-public partnerships to ensure financing of commercially viable infrastructure projects.
Long term resource generation: The liberalisation of the financial sector provides an opportunity to raise long-term resources. Rationalisation of FDI sectoral caps will generate inflows of long term capital.
The opening up of insurance sector has demonstrated the usefulness to Indian economy through generating employment, broadening the markets, infusion of global best practices/products and investment of long term resources in infrastructure.
Removal of sectoral caps of 26 per cent in insurance will allow free flow of long term foreign capital. Anomalies exist between foreign ownership between banks, NBFCs, asset management and insurance companies, which I trust the FM will look into.
Voting rights in banking: Banking is an important component of the financial architecture of the nation. Shareholder's rights need to be treated at par with other businesses. Currently voting rights are capped at 10 per cent, regardless of the level of shareholding. This needs to be amended to reflect the true shareholding.
Pensions: There is a strong case for taking immediate action on pension reforms. Clarity on regulatory framework will develop this critical business. Entry of pension funds will provide long term funds to the capital markets. There are obvious synergies between insurance and the pension sector.
Annuitisation is a specialised skill developed by the insurance industry in addition to managing long term assets. The insurance industry has built a strong and widespread distribution infrastructure, which can be effectively leveraged for distributing pension products and undertaking investor education.
Distortions in contractual savings rate: Understandably the dichotomy of administered high interest rates in small savings and the interest rates determined by market forces cannot be resolved overnight. However, this anomaly is unsustainable and is only a short term panacea for small savers.
This systemic distortion not only puts an unsustainable pressure on the fisc, but is also an impediment to pension reforms. The finance minister could choose from alternate structures like graded interests rates with a spread on bank rates, or floating interests that will not only safeguard the interest of the small savers but will also minimise the impact on the fisc.
Credit guaranty: The 2002 Budget had initiated the process of setting up a credit guaranty institution with an agenda of guaranteeing residential mortgage loans against default by borrowers thereby reducing systemic risk in the financial markets.
The default risks in mortgage lending on account of interest rate volatility or economic hardship could have a significant impact on the financial system. A credit guaranty institution will reduce some of the systemic risks and broad-base the mortgage market.
The global community has high expectations of India as the country emerges to find its rightful place in the global economic order. It is important the government capitalises on the strength of the economy to push through progressive reforms.
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