Raghuram Rajan Sounds Banking Sector Overhaul, Full Re Convertibe

The country’s banking sector will see major changes in the coming years with the entry of new participants, Raghuram Rajan, Governor of the Reserve Bank of India said in Pune on Friday. The full convertibility of the Indian rupee will also be a reality in a few years, he said.

PSU banks will be the biggest agents of change, he said. The change will be seen mainly in social banking. Most banks will work with the social sector because that is where new business is going to be, he noted.

“We are going to have a whole set of new institutions, payments banks, small finance banks, and we are going to possibly have postal bank,” said Rajan. “The existing institutions are going to change tremendously. Public sector banks are going to be a tremendous change agent.’’

On rupee float Rajan said the central bank is looking at allowing full capital account convertibility in a few years.

“My hope is that we will get to full capital account convertibility in a short number of years,” he said.

Full capital convertibility means a foreign investor can repatriate his money into his own local currency at will, which is not allowed in the country now.

“I think most people would agree that opening up to short-term debt flows is usually not very clever for reasons of financial stability,” Rajan said while delivering Kale Memorial Lecture at the Gokhale Institute of Politics and Economics here.

While there will be opportunities arising from the derivatives market, which will be a lot more vibrant, new opportunities will emerge from use of information technology used by banks, and their business correspondents with clients, he said. IDFC, which plans to start its business from Oct 1, plans to use latest technology that is likely to reduce cost and use of manpower, while improving experience for the customer.

IDFC and Bandhan will be the two new universal banks and RBI committees are evaluating 72 applications for small finance bank and 41 for payments bank.

Jaitley Unveils IFS Centre Framework

RBI Governor Raghuram Rajan’s comment on full capital convertibility assumes importance as Finance Minister Arun Jaitley on Friday launched the country’s first international financial services centre in Gujarat. Full rupee float can go a long way in the effective functioning of this global financial services hub.