h r khan : challenges and concerns of the central bank – opportunities and role for the commercial banks address by mr h r khan, deputy governor of the reserve bank of india, at the bankers ’ club, thiruvananthapuram, 10 june 2013. * * * the speaker acknowledges the contributions of colleagues in reserve bank of india. accompanying slides can be found at the end of the speech. original presentation is on the bank of india website. 1. it is a pleasure to be in the midst of so many bankers & colleagues in this serene temple city of thiruvananthapuram in god ’ s own country of kerala. bankers ’ club, as we all know, provides an informal platform for exchange of views and information on the banking system and about the economic environment in which banks operate. this has assumed added importance in these challenging times for the economy and the financial system. today, i intend to cover ten major challenges confronting the reserve bank and focus on the opportunities available to the commercial banks in relation to some of those challenges and role that the bankers can play to meet the challenges. the 10 challenges & concerns i would focus today are : ( i ) propelling revival of domestic growth ; ( ii ) controlling persistent inflation ; ( iii ) mitigating external sector vulnerabilities ; ( iv ) deepening the financial markets ; ( v ) maintaining a robust banking system ; ( vi ) ensuring integrity of the financial system ; ( vii ) building efficient government banking business models ; ( viii ) moving towards a less - cash society ; ( ix ) better customer service orientation of banks and ( x ) enhancing the quality of financial inclusion. i. propelling revival of domestic growth 2. several structural and transient factors, both global and local, have stymied the growth drivers in india in recent times. given the persistence of inflation, challenge for reserve bank of india has been how to address growth risks without losing control over inflation. as you are aware, the global economic activity still remains moderated amidst signs of diverging growth paths across major economies. in india, recovery was rather sharp and swift in 2009 – 10 ( 8. 6 per cent ) and sustained in 2010 – 11 ( 9. 3 per cent ). thereafter, overall gdp growth witnessed sharp decline to 6. 2 per cent in 2011 – 12 and further to 5 per cent in 2012 – 13 ( provisional ). the potential growth, which was around nine ( 9 ) per cent in the pre - crisis period

various departments of the government. unlike any other business, government business is also remunerative as reserve bank pays commission to the agency banks. viii. moving towards a less - cash society 32. the dominance of cash in our economy, informal financial system, organization of economic activity ( viz., dominance of retail vis - a - vis large - scale business ), proportion of migrant workers, etc. are some of the factors driving the need for cash in our society. the preponderance and wide acceptance of cash can perhaps be explained by the confidence it bis central bankers ’ speeches exudes as it has very high acceptability, it is extremely safe for undertaking and completing a financial transaction and it is highly liquid. the importance of currency is prevalent even in the advanced economies. in the us, currency - gdp ratio remained stable around 6 per cent in the first decade of the 21st century whereas in eurozone, it went up gradually to over nine ( 9 ) per cent in 2010. further, the currency - gdp ratio in the uk remained in a narrow range of 2. 3 – 3. 1 per cent during 2001 – 10 whereas japan registered a rise from 14. 7 per cent to 18. 1 per cent over the same period. india, however, has witnessed an increase in currency demand in relation to gdp with the average currency - gdp ratio hovering around 10 per cent in the 1970s, 1980s and 1990s, before increasing to over 13 per cent in the last decade. 33. increased usage of currency poses several challenges to the reserve bank, such as, ensuring availability of adequate quantity of banknotes and coins in the system, ensuring good quality banknotes, ascertaining their genuineness besides incurring the high cost of printing which has increased by approximately 31 per cent from during the period 2008 – 09 to 2011 – 12. even for individuals, there are associated risks, such as, fear of theft, idle cash itself does not generate income, time and cost for making payments can be exorbitantly high and last but not the least, the danger of forged currency notes in circulation. for banks, the cost of handling cash is higher as compared to electronic modes as it requires more manpower, more transaction time, more expensive to maintain security and segregating reissuable notes to maintain good quality notes in circulation requires additional resources. keeping these issues in perspective, reserve bank in its payment systems in india vision 2012 – 15 document has envisaged a less - cash society