Mumbai, Former Reserve Bank Deputy Governor M Rajeshwar Rao on Wednesday pitched for a “relook” into the fit and proper criteria for investments.
Rao, who demitted office in September last year, said a growing economy aspiring to accelerate the pace of economic expansion will need to have financial institutions with heft in order to support the growth.
Speaking at an event organised by industry body Assocham here, he said, “The challenge is in getting a fit and proper investor and conforming to the statutory and regulatory prescriptions. Relooking at the regulations to this end is something that the Reserve Bank and the government will have to look at closely.”
Alluding to the improvements in the sector through measures such as more principle-based regulatory frameworks, stronger governance frameworks and supervisory oversight, Rao spoke about the need for the RBI to show some flexibility to aid consolidations in the sector.
“Perhaps the time has come for the regulators to consider some flexibility for consolidation and capital raising by the private sector banks,” he said.
Beyond the private sector banks, there is a need for consolidation across the financial sector to support the long-term growth ambitions, he said.
“We need players with heft, and for this, besides the access to growth capital, the option of consolidation in the financial services industry will also have to come into play,” Rao said.
Rao added that a USD 4 trillion economy aspiring to grow to about USD 30 trillion by 2047 needs the financial sector to grow commensurately or even more.
In the banking sector, Rao noted that consolidation has already taken place. The number of public sector banks has come down from 27 in the year 2000 to about 12 at this point, he said, adding that regional rural banks have been reduced from 196 to 28.
However, he cautioned that growth will require capital. “If not privatised, these entities will require capital from the government,” he said.
He also said that while disinvestment and higher foreign investment limits are options, there is a need to look at more innovative options for raising capital in the public sector banks.
Rao also highlighted concerns in the cooperative banking space, pointing out that they will face challenges in competing and in offering technology-driven banking services.
On non-bank lenders, Rao said there are around 9,300 NBFCs; only 300 have sufficient heft, the rest are fairly small NBFCs.
“We may need a smaller number of financially stronger and better-regulated entities, and the challenge of consolidation in this segment is something we have to plan for,” he said.
