Further Reforms in Financial Sector

The draft report of the committe on financial sector reforms headed by Dr.Raghuram Rajan,Former IMF chief economist and presently professor at Chicago's Graduate School of Business has provided a blue-print for further reforms in financial sector.The committe has explored how growth and inclusion in growth process can be achieved with stability.The financial sector according to the committeehas to move in the same path in which telcom sector has journeyed and accomplished the results now before us.
Undertaking further reforms in the financial sector is not easy.Any effort in the direction of further reforms will be vehemently opposed by the left parties and the trade unions.The existing multiple pressure points may create too many stumbling blocks and stop all efforts at further reforms in financial sector.As a way out the committe has recommended a hundred small steps in lieu of bigger steps at reform.This may help avoid controversies and opposition from the multiple pressure points.
Deregulation,free entry,and competition are vital for efficiency and also for facilitating growth.Further reforms are urgently required to bring more and more people in to the growth processand thereby to the main stream of financial and economic life.According to the committe financial sector reforms can add betweena percentage point and two to existing rate of economic growth.We need larger investments in all sectors to increase growth rate and to maintain growth momentum.Liberalisation of bond market is also necessary to attract investments in certain crucial sectors like infrastructure.
The committe has made several recommendations such as sale of small under-performing state-run banks to another bank or to a strategic investor,liberal permission for take-overs and mergers of banks,allowing holding company structures in banking sector etc.The committe has also recommended setting up of small finance banks for accelerating the process of financial inclusion.In my view instead of trying this new concept it is better to give a full trial to the old concept of local area banks[LABs]The RBIhas not shown any seriousness in exploiting the LAB concept and making it a great success.LABs if properly encouraged can achieve large measure of success.They have the local feel and they are best suited for the task of financial inclusion.The RBI can give a full trail to LAB experiment and allow establishment of LABs in all districts.Private banks are functioning parallel to public sector banks.On identical lines LABs can operate parallel to RRBs.Housing Finance companies with net owned funds of over Rs5 crores,NBFCs which have not defaulted in paying public deposits and have networth of over Rs 5croresetc can be allowed to convert themselves in to LABs.Also private individuals who can bring initial capital of Rs5crores or more can be allowed to set up LABs.LABs with their local feel can be effective instruments for financial inclusion.They can effectively compete with RRBs and as a result the efficiency of RRBs may also increas in the days to come