India is embarking towards robust growth to achieve the position within top 5 economies of the world. In order to achieve that feet India requires huge development in infrastructure, industrial & manufacturing front. These are the core factors for countries growth however in order to achieve it every country requires financial innovation.
Financial innovation is a key to development but India should learn from the mistakes made by western countries while doing financial innovation. We have seen the consequences of unregulated financial innovation like securitization, off balance sheet funding etc. In western countries these innovations were made without keeping proper check point on risk involvement like high exposure or excessive leverage etc. We have seen the consequences of it, as global economy is suffering from great recession since the great depression.
India should keep in mind all these factors before taking a road ahead towards top 5 economies. However the current recession has showed the robustness of Indian economy particularly in banking & finance sector. Global financial sector are turmoil with the current recession but Indian banking and finance sector is unscathed by it due to robust regulation in Indian financial system. Today, Indian banks are highly capitalized & profitable.
Yesterday itself, the banking regulator has asked banks to divulge a host of details in the notes to account in the balance sheet from the year ending March 2010 onwards, which will vastly increase the level of transparency. Among the information that banks are required to disclose include concentration of deposits, advances, exposures and non-performing assets (NPAs). In addition, banks will have to disclose
Disclosures relating to concentration of deposits include total deposits of 20 largest depositors and the percentage of deposits of these 20 largest depositors to total deposits of the bank. Similarly, banks are required to display total advances to 20 largest borrowers and the percentage of advances to 20 largest borrowers to total advances of the bank. In connection with NPAs, RBI has asked banks to reveal which are the top four borrowers who have defaulted. They also have to disclose the extent of non-performing assets that banks have in respect of each industry. Banks will also not be able to sweep bad loans under the carpet as they now have to declare gross non-performing assets at the beginning of the year and gross NPAs added during the year. If there is a reduction in bad loans, banks will need to provide a break-up of how much of these were due to upgradations, recoveries and write-offs. A new disclosure also requires banks to disclose all the SPVs that they have sponsored in India as well as abroad.
This kind of initiative enhances transparency in the system without eroding growth factor. Today the challenge in bank regulation, underlined by the financial crisis, is to strike a balance between stability and innovation. It is a balance that can and must change over time. Innovation should be made considering the benefits available to up-gradation of Indian society rather than producing bonuses for bankers.
Today India needs financial deepening and financial inclusion. It is possible to have financial deepening, a bigger banking system, without inclusion. That is not what India wants today. Indian wants deepening of financial innovation with inclusive growth.
India needs a fresh set of players who can design business models for financial inclusion. Now, India is a second fastest growing economy in the world and every investor wants to share a pie of its growth. There are lots of foreign banks eyeing to take a banking license in Indian Financial system. India should take an advantage of this opportunity, as global economy is not going to achieve high growth for quiet some time so investors can pump money in a growing wheel like India.
India should ask a question to foreign investors, banks & corporate seeking banking license in India, you want a banking license then why don’t you enter where you could make a difference? Why don’t you start from the bottom of the pyramid, the rural area? The onus should be given to foreign banks to innovate in the rural market. It will require them to combine local talent and IT in creative ways. It is a serious bottom-of-the pyramid challenge and it can translate into enormous payoffs worldwide and in India.
Foreign firms are doing the same thing in manufacturing sector like establishing industry in tier-3 cities so why not they can do it in banking front. Foreign banks are the one who introduced retail lending & cash management in Indian banking industry, afterwards all the private sector & public sector banks followed it.
In order to catch investors seeking banking license, India can propose some incentives like – in phase I entry into rural areas, in phase II allowed acquisitions of regional rural banks and in phase III access to the main market.
Considering the current global situation, growth of Indian economy and above mentioned incentives I think foreign banks can ready to upgrade bottom of the Indian pyramid, innovation of foreign banking in rural area. It will make huge benefit for India in terms of inclusive growth with deepening in financial system. Seeing foreign banks in rural area, private & public sector banks will also jump into this and makes the market more competitive and enhances further growth.