Next phase of bank reforms soon

Prime Minister Manmohan Singh with finance minister P. Chidambaram in Mumbai on Saturday. (AFP)

Mumbai, June 4: The government will soon launch the next phase of banking reforms, Prime Minister Manmohan Singh said today. The reforms will focus on consolidating the financial system and setting up an active debt market.

“We can’t achieve a sustainable growth without a strong, stable and efficient banking sector. While there is no single model, the system must consolidate itself,” he said at the bi-centennial celebrations of State Bank of India.

The government will give greater autonomy to nationalised banks in managing their staff and determining their organisational structure, he added.

He also highlighted the need for an active debt market to provide long-term finance to industry. According to the Prime Minister, India scores over China in the robustness and soundness of its banking system.

“The first phase of banking reforms is coming to a close and we are moving on to the next,” he added.

Stressing the need to focus on organisational effectiveness of banks, Singh said initiatives must come from the banks themselves. Corporate planning and organisational restructuring are necessary for improving productivity and profitability.

A properly designed incentive system that improves productivity and encourages employees to deliver quality services must be clearly spelt out, he added.

“Innovation and customer services are going to be the key drivers of success in the future,” he said.

Singh also asked banks to increase credit to agriculture and provide adequate long-term loans to small and medium enterprises (SMEs).

He pointed out that with a gradual disappearance of development banks in their original form, a gap in credit availability is emerging. Adequate long-term finance for medium and, more particularly, small enterprises is a major concern.

Apart from developing an active debt market to provide long-term finance to industry, banks also need to expand their credit portfolio to include long-term finance to small-scale industries, he said.

“Providing credit is a fundamental function of banks. The sectoral deployment of credit must keep pace with changes in the structure of the economy,” he added.

He said while banks have achieved a higher growth in providing credit to agriculture and allied activities last year (2004-05), the momentum must be carried further.

“Credit for agriculture and allied activities is not a single market. Provision of credit for high-tech agriculture is no different from credit to industry,” Singh said.

Emphasising on the need to step up agriculture credit, Singh said special attention was required to cater to small and marginal farmers.

“There is a need to restructure rural branches of commercial banks to increase credit,” he added.

The Prime Minister’s emphasis on restructuring of rural banks comes a day after finance minister P. Chidambaram announced that regional rural banks would be merged by August end.

Singh said SBI should show the way to all banks in widening and deepening the market for rural credit. It should take the lead in financing infrastructure development through innovative products and better risk management capabilities that can ignite a boom in public-private partnerships.