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Research Imperatives for the Indian Banking Sector (Shri S. S. Mundra Deputy Governor - January 29 2016 - organized by Gokhale Institute of Politics and Economics and IBS Hyderabad)

News and Press Release - Dated:- 30-1-2016 - Introduction Dr. J. Mahender Reddy, Vice Chancellor, ICFAI Foundation for Higher Education (IFHE) University; Shri S.V. Seshaiah, Director, IBS, Hyderabad; members of faculty from Gokhale Institute of Politics and Economics, Pune and IBS, Hyderabad; Delegates of the Research Conference; ladies and gentlemen ! I am grateful to Gokhale Institute of Politics and Economics, Pune and IBS, Hyderabad for inviting me to deliver the inaugural address at the 1s .....

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nks are the bedrock of financial system in all emerging economies and India is no different. The banks in India have been quite effectively performing the vital function of financial intermediation. The health of the banking system and that of the economy share a symbiotic relationship and at this juncture when the global growth is still stuttering, the banking system also faces a multitude of challenges. Each of these challenges has different genesis and probably different solution. But, challe .....

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rther research which would generate fresh ideas for improving the efficiency and effectiveness of the banking sector. Why research is important? 3. According to Ben Bernanke, himself a researcher and a practitioner, research provides an important long-run perspective on the issues that we face on a day-to-day basis. Theories that evolve out of profound research remain relevant forever. Let me quote from our latest Financial Stability Report. When current wisdom does not offer solutions to extant .....

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service their debts, that is - pay only the interest but had to roll over the principal periodically through cash flows from current investments) and Ponzi borrowers (whose current cash flows were insufficient to meet debt obligations but borrowed on the faith that an appreciation in the asset values could take care of such obligations). The dominance of the Ponzi borrowers can cause disruptions in the financial system when asset prices stop rising. As IMF and other financial research houses mo .....

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the main drawback of government intervention, but a necessary measure to address a failure in aggregate demand. It is important to emphasize here that the theory was first presented by John Maynard Keynes in his book, The General Theory of Employment, Interest and Money, published in 1936, during the Great Depression. Keynes said we cannot, as a community, provide for future consumption by financial expedients but only by current physical output. Of course, there are many economists who vehement .....

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theory stays relevant evoking strong reactions from supporters and baiters alike even after eight decades of being first published, in itself is a great testimony to the quality of research undertaken by him. 5. The need for deep-seated research in the area of banking, which itself is a highly dynamic field, with close linkages to economic fortunes of the country, can be hardly over-emphasized. Given the dynamic nature of the sector, banking research has to continuously evolve. Failure to ignore .....

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uld require creative imagination and mark real advance in the field. But in my talk today, rather than discussing more distant research topics like Effects of Population Aging on Economic Growth or What ails a Demand Constrained Model of Growth , I would like to focus on some bread and butter issues confronting Indian banks, which the sector would do well to study in greater depth. Some important research undertaken by RBI/ Government in past and outcome 7. As you may be aware, RBI and the Gover .....

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peratives and other agencies played a negligible role. This prompted the Reserve Bank to play an active role during 1935-1950 in promoting the co-operative credit movement through a variety of initiatives. 8. Similarly, the Report of the All India Rural Credit Survey (1954) highlighted that agricultural credit not only fell short in terms of quantity, quality but also failed in serving the right purpose and the right people. The outcome of the survey was developing co-operatives as an exclusive .....

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ce of timely and effective research. As I have argued above, the need for upping the policy research in banking at the current juncture is very high. The sluggish economic revival following the GFC has adversely impacted the banking sector. Some of the issues which concern the sector relate to those of asset quality, capital adequacy, profitability, risk management and governance. Reflecting the concerns and risk aversion, banks business (deposits and credit) continues to show moderation. Slowdo .....

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mandated higher capital standards, stricter liquidity and leverage ratios and a more cautious approach to risk. This implies that the banks would need to improve their productivity and efficiency. They would also need to make a quantitative assessment of revenue streams from each product and service and an efficient transfer-pricing mechanism for efficient capital allocation. 11. At the same time, the banks would also need to venture into hitherto untapped segments to identify profitable busine .....

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new banks and subsidiarisation of the foreign bank branches, on the one hand, and the changing profile and simultaneously rising aspirations and expectations of customers on the other, is making the turf more competitive. Under the circumstances, the need for supportive research so as to find out an optimal business delivery model, target set of customers, product profile etc., suitable to the risk profile of each individual bank, can hardly be overemphasized. The banks also need to respond to .....

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Among others, these include, credit to agriculture, Micro, Small and Medium Enterprises (MSMEs) and private sector leverage. An analysis of the trends in bank finance to these sectors throws up quite a few research questions. I would delve into some of these in detail. Agriculture 14. A significant transformation has taken place in the character of agricultural credit since the decade of 2000s. The common perception about agricultural credit is that it has rural orientation and given the pre-do .....

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for research in the area. 15. As per the latest available All-India Debt and Investment Survey, the proportion of debt owed by cultivator households to formal sources stood at around 64 per cent as compared to 36 per cent owed to informal sources. Moreover, the proportion of debt owed to formal sources has seen a decline from 66.3 per cent in 1991 to 64 per cent in 2013. These figures provide an insight into the existing unmet demand for credit among cultivator households, which is evidently be .....

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lture being designated as one of the priority sectors for bank lending. 16. Agricultural credit, like overall bank credit in India, has traditionally been concentrated in the southern and northern regions of the country. In 2012, the southern and northern regions together accounted for about 62 per cent, with the southern region alone accounting for 41 per cent of total agricultural credit. Further, there was concentration of agricultural credit in select districts. In 2012, 15 districts account .....

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m credit in total agricultural credit has experienced a secular decline reaching 32 per cent in 2013-14 from 74 per cent in 1990-91 suggesting a neglect of capital formation in agriculture. 18. Few other patterns that are noticeable in the farm sector are: Decline in average size of operation landholding to around 1.15 hectare from more than 2 hectare about four decades ago. To put it in perspective, this size is 1/10th that in Thailand and about half of that in Indonesia while in the USA the av .....

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on agriculture as a priority sector has been effective in encouraging agricultural investment? Have small farmers benefited relative to large farmers? Have incomes of the farmers smoothened if not actually enhanced? While in villages, non-farm sector provides more income generating activity than farm sector, why do people still continue to stick to farming? Can 18% of GDP produced by agriculture sustain 47% of the workforce? What has been the impact of land fragmentation on agricultural producti .....

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n MSMEs in the country, providing employment to 111 million people which is next only to the agricultural sector. The sector accounts for 45 per cent of the manufacturing output and contributes close to 40 per cent of all exports from the country. Further, about 55 per cent of the MSMEs are located in rural areas, thus offering a great potential for rural development and inclusive growth. 21. Despite a large contribution of the MSME sector to the GDP, the sector often complains about lack of fin .....

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zation that if the country has to move to a higher growth trajectory, then MSME sector would need to play a central role. In recent years, both Government as well as RBI have made substantial efforts to ease various constraints faced by the sector. While GoI has established Micro Units Development and Refinance Agency Ltd. (MUDRA) for developing and refinancing all micro-finance institutions (MFIs) which are in the business of lending to micro and small business entities engaged in manufacturing .....

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ancing (NAMCABS) for sensitising the bank staff about the financial and other lifecycle needs of MSME borrowers. While the steps taken by the authorities are commendable, a fundamental question remains whether the remedial measures that are being administered are based on proper diagnostics? 23. Against this backdrop, research related MSME sector could focus on: Reasons for sickness / quick mortality in MSME sector and to what extent is delay in sanctioning by banks responsible for it? What are .....

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ainable amounts of debt from various sources including bank finance and oversees borrowings. As we notice now, several indiscriminate corporate houses continued market borrowing with a view to increase their market share and to expand capacity without any regard to domestic and global demand situation. In fact, the rate of sales growth of the corporate sector particularly of listed manufacturing companies, declined from an average of 28.8 per cent in Q1 of 2010-11 to 11.4 per cent in Q2 of 2012- .....

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les. The obvious fallout of this indiscriminate borrowing is a severe deterioration in their ability to service debt, besides casting an adverse impact on banks balance sheets. An indirect outcome of higher corporate leverage is also likely in terms of poor transmission of monetary policy impulses as corporates may not be in a position to benefit from falling interest rates due to already high levels of debt. 25. Against this backdrop, there are a multitude of areas that should be looked at in m .....

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bt obligations in different ways, one of which is deleveraging. Many companies are now deleveraging - paying off debt by selling off assets, more so as banks cease to restructure their bad debts. It is important to weigh the effectiveness of such methods against the costs it imposes on the growth of the economy. 26. While one is quick to demonize the borrowers that are unable to repay their debt to the lenders, it would be unfair to say that all of these highly leveraged borrowers are Ponzi borr .....

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created is not jeopardized and right lessons are drawn for future guidance. It is, therefore, important that some meaningful research could be conducted into 3-4 of these stalled projects, undertaking a threadbare analysis of the development of the project from scratch including the means and structures used for obtaining finance, extent and quality of equity brought in by the promoters, subsequent developments at various project stages, end outcome and so on and develop them as case studies for .....

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