h r khan : banks in india – challenges and opportunities keynote address by mr h r khan, deputy governor of the reserve bank of india, at the bfsi conference 2014, organized by sbicap securities, mumbai, 12 june 2014. * * * the speaker gratefully acknowledges the contributions of shri. prakash baliarsingh, smt. nilima ramteke and shri tulasi gopinath of the reserve bank of india. 1. smt. arundhati bhattacharya, chairman, state bank of india, shri. deepak parekh, chairman hdfc, shri. v. g. kannan, chairman, sbi cap securities ltd., shri. mani palivesan, managing director, sbi cap securities ltd, distinguished panelists and participants. it is a pleasure to address the bfsi conference 2014 which features panel discussions on topical issues in banking. the first panel discussion, interestingly, is on disruptive themes for next decade. the word disruptive is usually used with a negative connotation and therefore to be chosen as the theme for the panel discussion is a bold decision. on a careful rethinking, it seems disruptions can be used as synonym for challenges posed by paradigm shifts in the environment, thereby questioning the way things are done today. these challenges are opening the opportunities which banks should harness if they want to remain relevant in the financial service space in india. therefore, in my address i intend to focus on some of these challenges & opportunities. 2. as at end - march 2013, there were 155 commercial banks including 151 scheduled commercial banks ( scbs ) of which regional rural banks were 64. the total number of bank offices at end - march 2014 is estimated to have reached 1, 15, 014 and the population per office, 1, 10, 052. in terms of the regional spread of the bank offices, while north eastern region accounted for about 2 per cent ( 2, 785 bank offices ), southern region accounted for about 28 per cent ( 30, 925 bank offices ). despite such vast expansion of banking network, banking penetration still remains relatively low. according to the crisil ’ s financial inclusion index, inclusix, which covers three parameters of branch penetration, deposit penetration and credit penetration, at all india level, the index is placed ( on a scale of 100 ) at 40. 1 in 2011, reflecting under penetration of formal banking facilities in most part

##ging is expensive. thus, although hedging may delay, and perhaps even smooth out, the adjustment, it cannot eliminate, without prohibitive cost, the consequences of exchange rate change. accordingly, the currency depreciation that we have experienced of late should eventually help to contain our current account deficit as foreign producers export less to the united states. on the other side of the ledger, the current account should improve as u. s. firms find the export market more receptive. but in the process, dollar prices of imports will surely rise. * * * when the temporary forestalling of the u. s. balance of payments adjustment process comes to an end, does that suggest a steepening of the decline in the dollar's exchange rate? that many exports even from europe are priced in dollars is a trading convention. it does not affect the costs in domestic currencies that exporters incur. as i pointed out in the beginning, the most sophisticated analytical techniques have been unable to profitably project the exchange rates of major currencies. yet, most commentators argue that because the current account deficit must eventually narrow, the price - adjusted value of the dollar must accordingly decline. but how can exchange rates and the current account be systematically related, if exchange rates are inherently unpredictable? the answer is that the point at which the u. s. current account deficit will be forced to narrow is itself inherently difficult to predict. the current account reflects the myriad forces that bring our transactions with foreign economies into balance at our borders, of which exchange rates are only one. but those forces that, in the end, are reflected in a current account surplus or deficit are both domestic and foreign. indeed, our current account balance can be shown to be exactly equal to the difference between domestic saving and domestic investment. in fact, it is often instructive in longer - term analysis to view our current account in terms of its domestic counterparts. as i pointed out in a speech last november, 3 virtually all of our trading partners share our inclination to invest a disproportionate percentage of domestic savings in domestic capital assets, irrespective of their differential rates of return. people seem to prefer to invest in familiar local businesses even where currency and country risks do not exist. for the united states, studies have shown that individual investors and even professional money managers have a slight preference for investments in their own communities and states. trust, so crucial an aspect of investing, is most likely to