Banking on Universality
-
Upload
lilla-csonka -
Category
Documents
-
view
231 -
download
0
Transcript of Banking on Universality
8/13/2019 Banking on Universality
http://slidepdf.com/reader/full/banking-on-universality 1/3
Banking on UniversalityAuthor(s): Joydeep SenSource: Economic and Political Weekly, Vol. 37, No. 48 (Nov. 30 - Dec. 6, 2002), pp. 4770-4771Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4412891 .
Accessed: 14/12/2013 06:34
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp
.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact [email protected].
.
Economic and Political Weekly is collaborating with JSTOR to digitize, preserve and extend access to
Economic and Political Weekly.
http://www.jstor.org
8/13/2019 Banking on Universality
http://slidepdf.com/reader/full/banking-on-universality 2/3
CPDThaddealt hissensitivematter n alittle moredetail.
The principalrecommendationswith
regard o corporate axes are simplifiedand lower taxrates,abolitionof most ofthe ncentives ndaligningbookdeprecia-tion with tax depreciation.What has in-vited corporatewrath are the last two
suggestions.In
myview, industrymust
seriously xamine heimpactof abolitionof incentives,manyof whicharefor 'non
recurring' xpenditure, eriouslyin thecontextof reductionn tax rates.As re-
gardsdepreciation, ithnewrequirementsof computing ookprofitsafterallowingdeferred ax liability,the impactof this
suggestionwill be margina'.
IV
Concluding Observations
CPDTmakesa strongandcogentcase
forautonomy f taxadministration,rans-formingt into a taxpayer ervicedepart-mentandabolitionof fiscal incentives. tis arguednthisarticle hatgovernment'srecordwithregard o genuineautonomyof even commercial nd industrial ublicsectorenterprisess dismal.Oneis boundto have seriousdoubtsaboutgovernmentgranting utonomyo CBDT.Even f oneleaves this aspectaside,for the orderoftransformationequired,empiricalevi-dence uggestshat t s notpossiblewithout
strongfactors- positive motivationor
regulatoryrother xternal ressures. ortransformationo succeed t shouldmakebusinesssense. CPDTbeyondmakingavirtuous asefor 'goodconduct'doesnot
provideransformationynamicsitherorindividualsor for CBDT to become aservice activity. As regards ncentives,CPDT houldhaveappreciatedowdeeprooted heseare. It has harped oo muchon the distortion ffect andadministrativehassles.Post-reformmacroeconomicn-
vironment,n itself, is a strongcase forabolitionof incentives.Benefitof incen-tives is too
small,particularlyor house-
holds thatsave a highproportionf their
income,to influence he level of saving.Besides,unlike n the pre-reform eriod,consumptions an mportantrowth river.Itmightbe advisable oreconsiderncen-tivesfor nfrastructurendhousing,npartbecausegovernmentsn the foreseeable
futuremaynotbeabletocreatepolicyenviron-ment that makes nfrastructureconomi-
cally viable and reducecost of housing.AlthoughCPDT has, perhapswith a
view topressurise overnment,xpressed
its concern that the efficacy of its recom-
mendations is likely to be vitiated if indi-
vidualcomponentsareselectively acceptedor rejected; success of tax reform efforts
depend on their implementation in an
integrated manner ,it will have to offer,
maybe behind the scenes, some optionswith analysis of pluses andminuses so that
government can take a more balanced
decision. Oneof the most important hings
missing from thereport s anydiscussion of
the government's credibility with regardto consistency of tax policy. Unless there
are some mechanisms installed to ensure
that governments do not tinker with tax
structure, ependingupon theexigencies of
revenue.Whateverdecisiongovernmenttakes hopefully t will be takenbearingin mindmanyof thepointsmadebyCPDT- itcannot hange tin ashort ime.CPDT
expectsmuchstrongercommitment nd
couragerom heIndian overnmentshandemonstratedy them n the recentpast.Probability f a highratioof recommen-dations rashedmauled)othoseacceptedis real.Till then he fieldis openfor com-mentators aving asyaccessto the mediato show how ill-educatedheexpertgrouphas been. One hopesthatbeforegovern-ment takesa finaldecisionsome seriousminded commentators will criticallyexamine he relevant ssues. B3
anking o niversality
If universalbanking s to work,we should have guidelinesthat areclear andmanageable;and once theguidelinesare inplace, thereshould not be any concessionson a piecemeal basis.
JOYDEEP SEN
he concept of universal banking, in
the Indian context, has somehow
come torepresent he reversemergerof a financial institution with its banking
progeny.Theburning ssue about universal
banking had been about how the institu-
tion would go about garnering Rs 18,000crore to meet statutoryobligations and the
degree of concessions they would be able
to obtain from RBI about the magnitudeof CRR, SLR and priority sector lending.In the context of universal banking, let us
spare some time for the real issues.
A universal bank provides the entire
spectrum of financial products/services,be it accepting deposits, offering short-
term andlong-term loans to industry, per-sonalloans, insurance, nvestmentbanking,etc. The practice of universal banking is
quiteold and the
global experiencehas
been mixed. In the US, after the bankingcrisis of the 1930s,theybanned itby passingthe Glass-Steagal Act of 1933. This pro-hibited commercial banks from activities
like investment banking, insurance, etc,and from taking equity positions in bor-
rowing entities. The idea was to mitigate
risky behaviourby restrictingcommercial
banksto their traditionalactivity of accept-
ing depositsand ending.Inrecent decades,a combinationof macroeconomic distress,internationalcompetitive pressureand the
creative nventionof new financial nter-mediaries has helped the US financial
systemovercome heregulatorymandateof financial ragmentation.n the 1990s,the US has beenslowly movingtowardsuniversalbankingby rollingback someof the earlier restrictions.The conceptof universalbankinghas workedin the
European context. In countries likeGermany, witzerland, rance, taly,etc,commercial ankshavebeenselling nsur-anceproducts,whichis variouslyknownas Bancassurance r Allfinanz.
The real issue is whetherwe needuni-versalbanks nIndiaandhowtheconceptis different rom he traditionalonceptofwhatmaybecalled narrow anking'non-universalbanking).Anyway, t is alreadybeing practisedhere; many traditional'narrow' anksareofferingahostof otherservices ikemutualunds, onsumeroans,
housing inance,merchant
anking,nsur-
ance,etc,eitherbythemselvesorthroughsubsidiariesrjointventures.Oneobvious
advantages that he scenarioof financialserviceprovidersecomesessfragmented,which seasier orregulatorsokeep rackof. This argumentmay be juxtaposedagainstthe fact that more than 37,000NBFCsapplied o RBI for registrationfew years back, in the clean-up drive
following heCRBscam.Thereweremanymorewhodidnotevenapply.Thequestionis, did we ever need so manyNBFCs?If
4770 Economicand PoliticalWeekly November30, 2002
This content downloaded from 146.110.156.8 on Sat, 14 Dec 2013 06:34:07 AMAll use subject to JSTOR Terms and Conditions
8/13/2019 Banking on Universality
http://slidepdf.com/reader/full/banking-on-universality 3/3
the traditional anks,with their reach nthe interiorsand ruralareas,had been
offeringall servicesincludingconsumer
loans, omany mall-timeperators ouldnothavemushroomed ndthingswouldhave been easierfor the regulators.
Bydiversifyingtsportfolio f services,a bank anuse itsexistingexpertisenone
typeof financial ervice n providinghe
other ypes.A bankpossesses nformationon the risk characteristics f its clients,which t can use topursueotheractivitieswith he ameclients. bank asanexistingnetworkof branches,which can act as
shopsforsellingproductsike insurance.Thiswayabigbank anreach heremotestclient withouthaving o take recourse oan agent.When an entityis offeringallservicesunder ne umbrella t saves timeand ransactionost for the consumer. orthe universal bank,' t leads to betterutilisation f capitalas it does not have
to havecapitalas pertherequirementsfthe various ntitiesbutone unifiedcapitalbase would cater to all the services ren-dered.In other words, the incremental
capital-outputatioICOR)wouldmprove.There reother dvantagesikeeconomiesof scale,buteconomiesof scale are notas much of an advantage n financialservices as in manufacturing.
However, othingomeswithouttscostordisadvantages.heremaybe loss of the
advantagesfspecialisation.ize and calearebeneficial nly fthey ead o increased
efficiency,or lower customer cquisitioncosts.But hisdoesnotalwayshappen, ndwe haveseenmany xamples f large ize
actuallybeingan impedimento innova-tionand lexibility.fabank ngagesn too
manyactivities,tmay osesightof itscore
responsibilitynd ncrease heriskprofileby ndulgingnuntested ctivities.RBIhasstated hat he movementowardsuniver-sal bankingshould foster stabilityand
efficiencyof thefinancial ystem,butbyitself t cannotprovide viableorsustain-able solution o theoperational roblemsof individualnstitutions
risingrom ow
capitalisation, igh level of NPAs, largeasset-liabilitymismatches,iquidity,etc.
Theideal situationwould havebeen tocleanup hebalanceheetsofFIs,andonlythereaftergo for mergerswith, or thetakeoverof, a largebank.Had thatbeen
done,universalbankingwould not havebeenjusta cover forFIs tryingto brushall theirproblemsunder he carpet.Uni-versalbankingwillcome inhandy or theFIs to coveruptheir oanand nvestmentlosses andignorethe realproblems hat
have landed hem n thepresent inancialmess. The bottomline s, in the Indian
context,howshouldwe go aboutachiev-
inguniversalbanking byexpandinghe
portfolioof banksor by convertingDFIsintobanks? nadeveloping conomy hereisalways heneed or ong-termnfrastruc-
ture/project apitalandspecialised nsti-tutionscatering o such needs.
DFIs in India
Talking fDFIs, et usgoback ohistoryfor a while. In 1953, RBIset up a com-mitteeunderA D Shroff o examinehowincreasedinance ouldbemadeavailableto theprivateector.Among he mportantcontributionsf theShroffCommitteewasthe recommendationo set upspecialisedfinancial nstitutionsorrouting unds totheprivateector.Theyrecommendedne
state-sponsorednstitution,nitially alled
the IndustrialDevelopmentCorporation,whichwasa divisionof RBIand henwenton to become heIndustrial evelopmentBankof Indiaand one private ector n-stitution alled heIndustrial evelopmentandFinanceCorporation, hich went ontobecome heIndustrial redit nd nvest-mentCorporation f India.The present
day developments aveto be seen in the
perspectiveof the objectivesfor whichtheseweresetup whether heconversionto universalbank, n spiteof all the ad-
vantages,wouldhelp nrouting dditional
funds or industrial ctivity. na scenariowhereDFIs are convertedntobanks, hesourceof fundswouldnot be as longtermasprojectoans,hence herewouldalwaysbe a tendencyof usingshort-termundsfor funding ong-termoans.This would
go on fine as long as interestratesareconstantor movingdownward;marginswould shrinkwhenshort-termatesstart
movingupwards.Anyway, herewouldbea perpetual sset-liabilitymismatch.
A glanceat section4-A of CompaniesAct tells us of the various inancial nsti-
tutions; t is a fact thatthey
came intoexistence because of the need for
specialisednstitutions, g, SIDBIcater-
ing to small industries r NABARD ca-
tering oagriculture/ruralreas.Changingthe form of a specialisedinstitution s
justified nlywhenthasoutlived tsutility.Therearecases,e g, ShippingCreditandInvestmentCorporationf India SCICI)
being mergedwithICICI, ndustrialRe-construction ankof India IRBI),whichused to cater to sick industries,beingchanged o IndustrialnvestmentBankof
India IIBI) ocater ogreenfieldprojects.However, hese areexceptions. ndia tillneeds nfrastructure/projectinance; f alltheinstitutionsikeICICI, DBIandIFCIare onvertedntouniversal ank'sorsomeobviousadvantages,we will be left withIDFConly.As in allsectors, here s needfor competitionn this sector as well.
Whicheverway we go about it, the
authorities houldcodifywhatcomprisesuniversalbanking,whatadvantagesuchanentity hould njoyvis-a-vis raditional
banks,whatwouldbe its responsibilityothe economyand the regulatory equire-ments ikeCRR,SLRandpriority ector
lending,rather handecidingpiecemealabout the concessionsto one institution.There houldbeseparateodesofconductfora traditionalank onvertingtself ntoa universal ankanda DFIconvertingntoa universalbank.Whena DFI becomesauniversal ank,t becomesadifferenttory
altogether; t gets access to short-termunsecuredmoneypayable ndemand.Oncethecode is in place,otherparticipantsfthe financial ystemcandecide forthem-selves whether ojump ntothefray.One
bigregulatory roblemn Indiasmultipli-cityofauthorities; BIwoulddecideabout
bankingactivities,SEBI wouldregulatemerchantbanking,IRDA would controlinsurance ctivitiesandso on. A uniformcode wouldclearsomeof the confusions
emanatingrommulti-agency ontrol.Therehavebeencertaindevelopments
in theregulatory tmosphere. ankshavebeen permitted o diversifyinto invest-ments and long-term inancingand theDFIs to lend forworking apital, tc. Butthemajor mpedimento complyingwithRBIstipulationss thatDFIsaresupposedto complywith the samerequirementssbanks.The guidelinewas thatany DFI,which wishes to do so, would have the
option to transform tself into a bank,
provided he prudential ormsas appli-cable o banks re ullysatisfied.Tobypasstheregulatoryequirements,heICICI ookthe 'reverse oute'
by mergingtself with
its bankingprogenyratherhenprepareblueprint f converting tself into a uni-versalbank.Reductions n CRRrequire-mentsand inking he nterest ateonCRR
deposits o thebankratewouldhelp,butit still leaves out a lot to be managed ocomeupto the evelof regulatory equire-ments.Hence,if universalbankings towork n India,we shouldhaveguidelinesthataremanageable,ndonce suchguide-lines are n place,there houldnot beanyconcessionson a piecemealbasis.F33
EconomicandPoliticalWeekly November30, 2002 4771
This content downloaded from 146.110.156.8 on Sat, 14 Dec 2013 06:34:07 AMAll use subject to JSTOR Terms and Conditions