India needs to constantly rebalance financial sector policies and instruments to respond to not only to financial markets, prices and overall stability considerations but also to developments in real sector, in particular trends in growth across sectors, regions and sections of population.
``Such a comprehensive but dynamic approach to development of the financial sector enhances contribution of financial policies to growth and employment while maintaining stability,`` said Dr. Y V Reddy, governor, Reserve Bank of India at Bali, Indonesia on November 8.
To enhance efficiency and stability of the financial system and thus contribute to growth and employment, several steps have been undertaken for widening, deepening and integrating financial markets although it is `work in progress.`
The RBI had also been contributing regularly to long-term operations (LTOs) funds to refinance industrial or agricultural development, generally on concessional terms. This practice has been gradually phased-out in the recent years as part of economic reform. While discontinuing contributions to the LTO Funds, net transfer of profits of the RBI as dividend has increased from about Rs.2 billion in 1992 to Rs.114 billion in 2007.
RBI favors a financial system that provides incentives to encourage flow of credit at justifiable terms and conditions and for purposes that ensure servicing of interest and principal, i.e., bankability of schemes.
Further, subsidies on interest rates through the banking system to small farmers and small exporters are currently provided for a limited period.
Further, with planned improvement in revenue accounts of centre and states and more normal liquidity conditions in money markets, there should be significant further enhancement in the proportion of bank funds that are made available for financing growth and employment in private sector.
Selective credit controls, as a means of encouraging or discouraging credit flow to select sectors, was pervasive during the pre-reform period. These have since been dismantled.
The stipulation is that 40% of advances in the case of domestic banks (and 32%, inclusive of export advances, in the case of foreign banks) be lent to specified priority sectors such as agriculture, small industries etc.
As a result of financial sector reforms, there has been expansion in lendable resources. However, during the reform process, the list of eligible sectors for treatment as `priority sector` was expanded to include investments in specified bonds and also activities such as venture capital. Several dilutions and distortions in computation of the stipulation occurred in the process.
As a result, there had been a growing perception of inadequate flow of credit to the traditionally preferred sub-sectors of priority sector, namely agriculture and small industries.
In order to address these concerns, a consultative and comprehensive exercise of review was undertaken and new guidelines on priority sector were issued in April 2007.
Consequently, priority sector is now restricted to advances to highly employment intensive sectors such as agriculture, small industry, educational loans for students and low cost housing. The shortfalls in lending to the priority sectors will have to be, as in the past, deposited with refinance institutions dealing with agriculture and small industries. Thus, sectoral focus in credit flow, with emphasis on employment, is ensured through stipulations relating to priority sector without necessarily undermining commercial considerations in banking activities.
It is useful to note that the valuation of bank stocks, of both public and private sector, are improving while foreign banks gather a fast increasing proportion of their global profits from Indian operations.
Information technology is critical to minimising transaction costs. The government`s on-going massive programme of rural employment and pension payments etc. can be implemented with minimal transaction costs by recourse to financial inclusion through I.T. RBI is encouraging and aiding the process.
The importance of financial inclusion for emerging market economies (EMEs) was also expressed by the governor.
He said that in view of the surge in retail loans, especially consumer durables, and attendant debt-servicing problems for many, a beginning has been made in the establishment of credit counselling centres as a non-profit activity, by some banks.
Apart from issues of appropriate pricing, instances of unequal contracts, unfair trade practices, non-transparent fees, intrusion into privacy, excessive penalties, delays in cheque-clearing, arbitrary revision of interest rates or equated monthly instalments, usurious interest charges in some cases and excesses by loan recovery agents have been noticed warranting several institutional, policy and procedural interventions by RBI
