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Another step for financial reforms - Views on News from Equitymaster
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  • Oct 26, 2009

    Another step for financial reforms

    Decades ago, India had decided that profit motive must be tempered by societal needs when it comes to the banking sector. For example, banks must not cater only to the more profitable urban areas but also the semi-urban and rural areas. Accordingly, the Reserve Bank of India (RBI) ensures a ratio of urban branches to semi-urban and rural branches. It maintains the balance through its branch licensing policy, under which banks currently have to take permission to open branches anywhere.

    However, with a view to broadening access to finance, the RBI may soon allow banks to decide where they want to open branches. So far, a bank had to open semi urban and rural branches in order to get a licence to open urban branches. As per a leading business daily, the criteria will now shift to how the bank has performed overall in all centres, used its existing licences and met its rural and semi-urban credit obligations.

    This development forms part of the recommendations made by the Raghuram Rajan committee on financial sector reforms. It may be noted that the RBI has earlier accepted the committee's recommendation of allowing banks to establish ATMs without taking its prior permission. We believe this is a positive step and will provide banks with greater autonomy, although it is important that the central banker keeps a watch on issues like concentration of exposure to a certain class of borrowers or certain sectors.

    Review of gas utilization policy
    Several months back, the government had frozen both the pricing and the utilization policy of the natural gas produced by Reliance Industries from the KG basin. However, given the high decibel dispute that has followed since then, the government is going back to the drawing board. As per a leading business daily, an empowered group of Ministers (EGoM), headed by Finance Minister Pranab Mukherjee will meet tomorrow to consider the allocation of natural gas.

    It may be noted that the government had earlier allocated the initial 40 m standard cubic meters per day (mmscmd) of gas to fertiliser companies, power plants, city gas projects, LPG plants and the steel sector. This time around, the EGoM is likely to allocate an additional 20 mmscmd of gas to the power and fertiliser sector.

    Given the demand supply mismatch, the wrangling for higher allocation of KG basin gas is hardly surprising. However, the lack of a firm policy on this accounted has harmed the perception of India as a good exploration destination in the mind of global energy giants. This was evident from the cold response to the latest round of auctions of Indian hydrocarbon blocks under NELP VIII. It is high time we got our act together and made the ground rules clear from the word go in such a crucial sector for the Indian economy.



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