Universal banking - issues and options for India

Abstract

After reforms with removal of concessional finance for Development Financial Institutions (DFIs) and their growing Non Performing Assists, there has been a lot of debate for converting them into universal banks. In this context RBI set up a working group under the chairmanship of S. H. Khan (KWG) and at the same time Government of India (GOI) appointed the Committee on banking Sector Reforms (CBSR) under the chairmanship of M. Narasimham. Both of them envisaged the convergence of role of DFIs and banks. In this report we have looked at various models of universal banking being followed in different parts of the world and their benefits and costs. Empirical studies are specific to a country`s financial and economic system hence may not be applicable in India. Most of the research has been done on the sustainability and regulatory aspects associated with universal banking . There has been very little emphasis of the conversion of DFIs into bank on the long term financing needs of the economy especially for developing economies like India. In this report we have analyzed the future direction of DFIs and long term financing in India. We analyzed three sources of long term financing capital markets DFIs and commercial banks. In India the capital markets are not well developed, the trends show that commercial banks have been increasingly financing long term projects whereas DFIs are moving away from term financing. However, the banks may not be able to meet the growing need for long term finance because of assert-liability mismatch, lack of expertise and high cost intermediation. In such a scenario it significant role till capital markets develop. We studied the role of DFIs in other economies and it was found that DFIs and bank can co-exist in a financial system if an adequate regulatory and supervisory system is in place . In developing countries like Malaysia, and Thailand it is being funded by government and multilateral agencies. Even in developed countries like Japan, the development work is done by development bank of Japan’s which has government backing and is being funded through insurance system run by postal department and FILPs Also in some of the other countries like Philippines the development banks are allowed to accept deposits from the public which further reduces the cost of the funds. Our conclusion is DFIs have an important role to play for catering to the specific development needs of the economy , at present it can be in arcs like infrastructure projects in lieu of well-developed capital markets. In the future it can go in for niche development roles as in the case of Japan. Hence to make them sustainable and to support the developmental projects government should support DFIs. This support may be provided by long term liabilities like insurance and pension funds. Our conclusion is DFIs have an important role to play for catering to the specific development needs of the economy, at present it can be in areas like infrastructure projects in lieu of well-developed capital markets. In the future it can go in for niche development roles as in the case of Japan. Hence to make them sustainable and to support the developmental projects government should support DFIs. This support may be providing by long term liabilities like insurance and period.