The Indian banking industry, which is going through tough times, must follow the “4D model” — deregulation, differentiation, diversification and disinterring, the Economy Survey 2014-15 said.
Deregulation and differentiation because of the high level of inconsistency in operation and performance of public sector banks, diversification and disinterring implying stricter bankruptcy laws and exit options.
It added that the banking sector is hobbled by policy, which has created “double financial repression” — reducing returns to depositors and misallocating capital to investors due to depressed returns on assets. This has led to a reduction in household savings.
The government’s report card also pointed out that there is lack of competition, which is reflected in the private sector banks’ inability to increase their presence while there is wide variation in the performance of the public sector banks measured in terms of prudence and profitability
“There is a lot of heterogeneity even among public sector banks and you cannot club them under one category. It is important to factor that while framing policies,” chief economic adviser Arvind Subramanian said.
According to the survey, the requirement of statutory liquidity ratio, a portion of deposits that banks have to invest in government securities, can be gradually relaxed, a move that would provide liquidity to lenders.