Right size of a bank remains a debate: Gokarn

The Reserve Bank of India (RBI) has decided to give new banking licences to create more capacity and competition in the Indian banking space but the right size is yet to be determined. "The right size of a bank remains a debate for the industry," said Deputy Governor Subir Gokarn.

Gokarn said new banks in the system would help achieve financial inclusion. "As we are moving further down the inclusion agenda, which is to try and get banking services at a very basic level, perhaps new banks are one way of achieving that," he added.

While bigger banks would be able to deliver services more efficiently, they aren't necessarily safe banks and the larger they get, the more of a risk they pose to the system as a whole, he pointed out.

The RBI had placed in the public domain a discussion paper in August 2010 on issuing a limited number of new bank licences.

In December, the apex bank said the issues the paper addressed on the entry of new private banks failed to get any consensus from the various stakeholders.

Gokarn was speaking at a conference organised by Federation of Indian Chambers of Commerce and Industry on corporate finance in Mumbai.

In his inaugural speech on infrastructure funding, he mentioned the banks' increasing exposure to infrastructure had raised concerns.

This is because infrastructure lending is over long periods while banks mainly depend on short-term deposits for funds. This leads to asset-liability mismatches. He said persistent lending to infrastructure goes against the basic banking model.

He said there were concerns on why alternative channels of funding were not emerging. It is projected that infrastructure will need financing of up to Rs 10,000 billion by the financial year 2016-17.

Bank financing to infrastructure in the year 2007 was 5 per cent of GDP, while it rose to 8 per cent in 2010. Hence, it is important for other funding options to open up for infrastructure.

"If you need foreign money in infra, then flows have to be oriented towards this," Gokarn said. He said in his presentation that Foreign Direct Investment in infrastructure in the financial year 2009-10 was 0.3 per cent of GDP.

He also mentioned that the domestic corporate bond market should be developed to meet the funding needs of infrastructure.

"This can be done by encouraging insurance companies and provident funds to invest in low-rated bonds by facilitating credit enhancements," said Gokarn.