Excellent address by RBI Governor to bankers at the BANCON 2010, here he talks about the way indian banks withstood during crisis and regulatory change which is going to happening in form of BASEL 3 accord.
He put forward some ideas and asked banks to discuss on it .
First Issue : Are Indian Banks Prepared for Basel III?
The building blocks of Basel III are by now quite well known: higher and better quality capital; an internationally harmonized leverage ratio to constrain excessive risk taking; capital buffers which would be built up in good times so that they can be drawn down in times of stress; minimum global liquidity standards; and stronger standards for supervision, public disclosure and risk management.
The Basel III package includes capital buffers to contain the pro-cyclicality of the financial sector. Building capital buffers will entail additional costs for banks with consequent implications for investment and hence for overall growth.
Building Buffers will make the capital ideal and will not add anything into productive, it is meant to use at bad times(its like putting more money in savings deposit(RBI) for interest rate...there by curtailing the lending power of banks to some extent.
To effectively deploy countercyclical measures, we also need to improve our capabilities to predict business cycles at the aggregate and sectoral levels, and identify them in real time. This will require better quality of economic and financial data as well as improved analytical capabilities.
In India the data collected from Ministry of Statistics is sometimes inadequate to predict the right conditions across the economy as well as markets, we need a more reliant streamlined data from each sector across the eonomy . I guess this can be done only when government makes a regulation for mandatory data submission from each department where it works...example:Collect all the land registrations across Pan India to get a feel of real estate sector pricing, collecting pricing from companies which manufacture the products etc..
Estimates show that the leverage in the Indian banking system is quite moderate. Notwithstanding the fact that the SLR portfolio of our banks will be included in computing the leverage ratio, Indian banks will not have a problem in meeting the leverage ratio requirement since the Tier 1 capital of many Indian banks is comfortable (more than 9%) and their derivatives portfolios are also not very large
Indian banks will not have problem in meeting the ratio as long as real estate value goes up,but once it starts coming down, we might feel the pinch.Though the derivatives positions of banks are not large our banks show significant revenue from trading.
Second Issue: Should Indian Banks Aim to Become Global?
The second issue I want to address is one that comes up frequently - that Indian banks should aim to become global. Most people who put forward this view have not thought through the costs and benefits analytically; they only see this as an aspiration consistent with India’s growing international profile.
Are our banks ready to become global and ready to meet the demands of global citizens..( Can Mittal bank on Indian bank to fund a major acquisitions across the globe?). Though SBI missed the boat of acquiring Citi Bank when it was trading at 1$ at the hieght of finanacial crisis due to government inefficient bureaucracy.
Can Indian banks aspire to global size?
As per the current global league tables based on the size of assets, our largest bank, the State Bank of India (SBI), together with its subsidiaries, comes in at No.74 followed by ICICI Bank at No.145 and Bank of Baroda at 188. It is, therefore, unlikely that any of our banks will jump into the top ten of the global league even after reasonable consolidation.
Should Indian banks aspire to global size?
Opinion on this is divided. Those who argue that we must go global contend that the issue is not so much the size of our banks in global rankings but of Indian banks having a strong enough global presence. The main argument is that the increasing global size and influence of Indian corporates warrant a corresponding increase in the global footprint of Indian banks.
The opposing view is that Indian banks should look inwards rather than outwards, focus their efforts on financial deepening at home rather than aspiring to global size
Third Issue: Should We Mandate Foreign Banks to Come in Only as Subsidiaries?
Here he talks about the subsidiaries role in indian context
Fourth Issue: Why Do We Need to Rewrite Laws Governing the Banking Sector?
Infact banking laws helped us to maintain a orderly banking system during crisis.
Requirement of minimum paid up capital and reserves, restrictions on payment of dividend, transfer of a percentage of profits to reserves, maintenance of SLR, restrictions on connected lending, maintaining a percentage of domestic liabilities as assets in India have all helped the Reserve Bank in preventing crises and maintaining financial stability.
Fifth Issue : Where Do Indian Banks Stand on Efficiency Parameters?
There has been a particularly discernible improvement in banks’ operating efficiency in recent years owing to technology upgradation and staff restructuring
One such is Core Banking System which helped banks to offer more services and reduced the time lag in delivering the services
He advised the banks to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers - in other words, reduce their intermediation costs, or in technical terminology, reduce the net interest margin (NIM).
This will lead to decreasing margins for banks and i beilive this lead to Bank Sector tanking down 3% in today's market.