Indian banks need to improve operational efficiency: RBI governor

The challenge for Indian banks is to improve operational efficiency by reducing costs and passing on the benefits to both depositors and lenders if they are to survive competition. This will involve constantly reinventing business models and designing products and services demanded by a rapidly growing and diversifying economy, RBI governor D Subbarao said today.

Speaking at an `International Finance and Banking Conference' organised jointly by the Indian Merchants' Chamber and the Institute of Chartered Accountants of India, Subbrao said banks in India will have to bolster capital base on a par with banks worldwide, adding that the financial crisis has prompted global financial authorities to mandate higher capital standards, stricter liquidity and leverage ratios and a more cautious approach to risk.

The theme of the conference was `Banking - Crisis and Beyond.'

The RBI governor cited a somewhat original idea proposed by Raghuram Rajan that institutions should maintain 'contingent capital' to tide over systemic crisis or idiosyncratic problems. This, he said, would potentially require banks to issue long-term debt instruments that would automatically covert to equity under specific triggers.

But, he said, designing the contingent capital provisions in a way that optimally manages the trade off between higher cost and lower moral hazard will be a real challenge.

While such safeguards are necessary, he said, they would also raise the banks' funding costs.