Monday, August 22, 2016
Mr R Gandhi, Deputy Governor of the Reserve Bank of India, at the FIBAC 2016 in a speech titled “New horizons in Indian banking”, Mumbai, 17 August 2016 said the following:
“I regret that at the very end of these two days deliberations on future of banks, I have to paint such a dismal future for your existence as banks….One big area, you vacated and / or let others to occupy by your lackluster attitude is there for your rightful reclaim, if only you make concerted and conscious effort. That is SME financing. Small and medium sized enterprises (SMEs) are a major, yet often overlooked sector by formal financial institutions. The SMEs reportedly account for more than half of the world’s gross domestic product (GDP) and employ almost two-thirds of the global work force. However, they are the neglected lot world over. As reported by the International Financial Corporation (IFC), a “funding gap” of more than $2 trillion exists for small businesses in emerging markets alone...
I can only conclude with the idea that if you make yourself socially relevant, not just relevant in economic sense alone, you can have hopes to exist”
Holy moly. unless Mr R Gandhi is simply thickheaded and does not understand, he should be ashamed of trying to blame the banks for this ignoring his own responsibilities as a regulator.
Who told banks to get out of SME financing? The bank regulators did; by requiring banks to hold much more capital when lending to SMEs than when lending to those perceived as safer. That made it difficult for banks to earn competitive risk adjusted returns on equity lending to the SMEs.
Who made banks socially irrelevant? The bank regulators did, by regulating banks without ever having defined their purpose… like that of allocating credit efficiently to the real economy.
And since risk-taking is the oxygen of any development, a developing country like India is one of those who could least afford to introduce regulatory risk aversion. Not as if those developed can either, but at least they have reached higher altitudes before starting to climb down their mountains.
In 2007, at the High-level Dialogue on Financing for Developing at the United Nations, I explained why the Basel regulations were harmful to development, and my opinion was even reprinted in October 2008 in the Icfai University Journal of Banking Law.
Sadly though, as happens with most central bankers and regulators from developing countries, they end up more interested in being accepted by their peers in the developed countries, and in belonging to their mutual admiration club, than in doing what is best for their own countries.