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videos | IST

Banking reforms: KV Kamath says banks didn't know how to build scale; held 1-year training programme for leaders

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Speaking to CNBC-TV18, KV Kamath spoke on whether India in 1994, looked like it was about to take off into reforms, he said, India was in the middle, it was wanting to take off, but did not have enough legs to do it. The mindset of the Indian entrepreneurs was in a bit of turmoil, in the sense that if the reforms had happened in their own areas -- how would they go about facing global competition?

The reforms of 1991 changed the banking sector in the India and its impact reflect even today on the facilities being extended by banks. Before 1991, Indian banks were not commercial companies. They were 99 percent owned by the government, which decided on the sectors that would get loans and RBI would set the price of the loan.
Once the government opened the economy in 1991, RBI asked its then governor M Narasimham to upgrade Indian banks to global standards. Narasimham first recommended bringing down SLR and CRR. SLR is the percentage of deposits banks must invest in government bonds. This went over 35-40 percent before 1991.
So, the government got ready cash, which it could use to monetise the deficit that had to be brought down. At the time, RBI used to buy government bonds, kept on giving them money and printed too much money, and to bring that money down they used to increase the CRR, which increased the cost of banks.
Brining both of them down was the first reform Narasimham introduced, but that was not the only one. He also raised Indian companies to global standards, as foreign companies were coming to India and they expected high standards, which were brought in by Narasimham as he implemented global accounting standards.
Narasimham ordered all Indian banks to classify NPAs as global banks did, provide for them as required by Basle rules and it had to be achieved by 1994-1996.
If all the money in banks was not available for the government to finance its deficit, the government found it hard to capitalise banks. So it decided to list them starting 1994 to get capital from the market. This meant the Nationalisation Act had to be amended to bring government stake down to 51 percent. However, this was not an easy decision for the Congress because they had nationalised banks, therefore it was counted as a very big reform.
In October 1994, SBI listed and then a series of other PSU banks got listed.
If banks were going to be run on global lines under Basel rules and regulated by RBI on global rules, why not give licence to private sector banks, which again was a big political U-turn from nationalising private banks in 70s and 80s. So, inviting the private sector to take fresh licences they had to be assured that they would not be nationalised again. It was a big reform that the government introduced. There were 10 entities which applied for licences, seven were issued. Some of the names were ICICI Bank, HDFC Bank, UTI and IDBI.
The final piece of the reform was ensuring that banks extended loans on market rates. Until 1994, it was the RBI which set the lending and the borrowing rates and that was liberalised by 1994. Banks were allowed to announce their own lending rates and the PLR had to be announced and made public.
Finally, the government had to be disciplined - the government used to borrow from the banks, SLR was always available. The government had adhoc treasury bills -- an instrument which allowed the RBI to finance government shortfall and that practice was stopped and the government was told, if you are borrowing they had a WMA limit and if they borrowed from the bank above the WMA limit, they would have to go to market and announce a bond issue.
This brought the government to the discipline of the market, the banks were already disciplined by the market and finally the RBI announced the reverse repo and repo windows.
One man was witness to all this and was seen by the RBI as abetting these reforms and that was KV Kamath. His last designation was President of the New Development Bank.
Speaking to CNBC-TV18 on whether India in 1994, looked like it was about to take off into reforms, he said, India was in the middle, it was wanting to take off, but did not have enough legs to do it. The mindset of the Indian entrepreneurs was in a bit of turmoil, in the sense that if the reforms had happened in their own areas -- how would they go about facing global competition?
"It was a challenging situation - there would be need for capital, there would be need for raising resources because DFIs were starved for money and the clients were likely to hit NPA wall. So, I wouldn't say the mood was positive, it was gloomy," said Kamath.
When asked if he thought opening would mean that Indian bankers did not know the state of the art in financial markets, Kamath said, in simple words if we had to scale up the branches and go from 350 to 700 we did not have the additional 350 managers, deputy managers, skilled staff. So we had to virtually start our own university. We had one year programme to train leaders. We codified the rules and gave it to NIIT, so that NITT to could train people and create them for the whole banking universe, not just for us, added Kamath. Banks had to create their own HR code, he said.
Watch the video for the complete conversation.