New Financial Reforms from new Governor of RBI

Raghuram Rajan has recently taken over as the 23rd Governor of the apex financial institution in this country – the Reserve Bank of India. He has also marked the start of his tenure with a clutch of well received financial reforms for the medium and short term. These measures could be viewed as a form of message for investors – both in India as well as outside the country. Incidentally, over the years the investors in India have continued to complain that not much has been done on the reform front in spite of the fact that Indian economy is struggling as a whole. The measures cover a wide array of issues like the falling worth of the Indian National Rupee (INR) and the banking sector.


Interestingly enough, while announcing the measures Rajan also stated that he wanted the investors to see that several steps were being taken for the betterment of Indian economy. The RBI is expected to start a special window where the banks will be able to exchange foreign currency non-resident dollar deposits or FCNR. This will be done for a rate of 3.5 per cent that stays the same throughout a year. However, this facility will only be applicable for investments where the tenure is at least 3 years.


Experts such as Jamal Mecklai from Mecklai Financial feel that this measure should reduce the fund related expenses incurred by banks. The RBI has also softened its stance regarding the re-booking of forward contracts that had been cancelled – this benefit will accrue to both the importers and the exporters. For the exporters this limit has been determined at 50 per cent compared to the previous rate of 25 per cent, which is the highest rate for the importers. From now on the banks shall also be allowed to generate their total as well as unimpaired Tier I capital by way of loans from international entities.


As a result of this step banks would now be able to take out greater sums of money from the overseas markets and this can be used to satisfy their capital necessities. Rajan has said that the RBI will work with regulators like SEBI and make sure the markets are more liberal than before. Also on the agenda is making the INR a more internationally viable currency. In spite of the fact that the measures were announced after the market hours came to an end the INR increased to 67.09 as opposed to 67.73 at the end of 3rd September, 2013, thus reflecting a positive trend for the stock market.


Experts think from the tone in which Rajan addressed the media while announcing the steps that he is going to be more hands on compared to his predecessors and that is a positive signal for all concerned. Rajan is meanwhile hoping to issue fresh bank licenses by January next year before Anand Sinha, the Deputy Governor, retires. Incidentally Sinha has been working in this domain of late. Dr. Bimal Jalan is supposed to lead the external committee that shall look after the licenses. As a matter of fact, major corporate groups such as Tata Sons, L&T and Reliance Capital have submitted applications for the licenses.


Rajan has assured that the RBI will be maintaining the best standards of transparency while issuing the licenses. He has also stated that he will be looking at different types of licenses as per the suggestions given by the latest paper regarding banking structures by the RBI – this reflects that he may have bigger things in mind as far as this sector is concerned. The RBI staff had also suggested recently that bigger cooperative banks in urban areas could be changed to commercial banks and the licensing needed to be done in a continuous way – these will be kept in mind as well.


He will also be making efforts to bring down the amount of restrictions in the banking sector as far as regulatory investments in the banking sector are concerned. At present the banks are supposed to put in 23 per cent of Net Demand and Time Liabilities (NDTL) in securities issued by the government. This has to be done so that they can satisfy the Statutory Liquidity Ratio (SLR) requirements. However, the governor has also stated that this shall not happen overnight – in fact it will only become a reality with improving financial condition of the government.


The RBI has also lifted the restriction on the maximum amount of branches that could be opened by a commercial bank. At present there is a restriction on the number of branches that can be started especially in tier 1 and tier 2 cities but with this regulation the banks no longer need to ask for the permission of the RBI. There could also be some changes to lending necessities of the priority banking sector – a committee will be set up under Nachiket Mor, a board member of RBI, for this purpose.


At present banks are supposed to loan out 40 per cent of their adjusted net banking credit (ANBC) to sectors such as agriculture, education, SMEs and housing. The Chairman of the State Bank of India, Pratip Chaudhuri, has appreciated the steps saying that they are properly thought out and will benefit the banking sector a lot. The new governor of RBI has however taken an issue with the big NPAs and has asked the banks to minimize the bad loans. KC Chakrabarty, Deputy Governor, is supposed to head a committee that will look into this matter and formulate ways to restructure and recover bad loans.


The RBI will be announcing its measures in this domain on the basis of the suggestions made by the said committee. From the discussion above it is clear that the steps are good enough and perhaps the new governor is more proactive but the question is how successful will he be – given the present condition of the economy a lot of people will be praying that he is! However, one feels that only time has the answer to this question as of now – we can only wait and watch!


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