As interest rate margins come under pressure from intense competition, fee-based services will become increasingly important.
The latest Report on Currency and Finance of the RBI covers the two years to 2008, a period of dramatic and turbulent changes. In 2006, the Basel-II norms were globally adopted, almost on the eve of the sub-prime crisis that started the following year. The crisis proved the inadequacy of Basel-II norms in dealing with the complex financial architecture that deregulation had inspired. The RBI’s dominant theme is that public sector banks have yet to comply with these n orms that will help them reorient their operations to the new challenges. The Report tells us why this is important and how it can be done.
Even from the surface, it is evident that despite the “commanding heights” occupied by the public sector banks (PSB), the clutch of private and foreign banks in India have been trendsetters for banking services and personnel policies. The Report details the milestones that mark this trend, one of which has great bearing on both the nature of banking transactions in future and the kind of human resources that will be required by the PSBs to cope with this new competition. As interest rate margins come under pressure from intense competition, fee-based services will become increasingly important. Basel-II norms directly influence the viability and capacity of banks to engage in this challenging business expansion. But the adoption requires capital on a huge scale. Over the next five years, the RBI reckons that banks will need roughly Rs 5,70,000 crore, of which more than Rs 3,70,000 crore will be required by PSBs. Neither internal resources nor the government can underwrite Basel-II entirely. A large part of the capital requirement in the medium term will have to come from the market which means government stake of 51 per cent will have to be reconsidered since it is “hampering the growth of the PSBs”. The Report drives home this point by also asserting that this dilution may be necessary to ease the “operating environment” of the banks, presumably to give the PSBs competitive advantage vis-À-vis their private sector peers.
The Report does not spare the human resources too and more obliquely, the change-resistant unions. It bemoans the low business productivity of PSB employees and the high intermediation costs that render them uncompetitive. For Dr D. Subbarao, both the Annual Report, which delineates the limits to monetary policy by government overspending, and the Report on Currency and Finance, contain the challenges that he will confront over the three years he occupies the Governor’s office. They are his best briefing.
