raghuram rajan : competition in the banking sector – opportunities and challenges talk by dr raghuram rajan, governor of the reserve bank of india, at the annual day lecture of the competition commission of india, new delhi, 20 may 2014. * * * good evening. shri ashok chawla, distinguished invitees, our friends from the press, and ladies and gentlemen : it is a great honour to be invited to deliver the annual day lecture at the competition commission of india. competition is the life force of a modern economy – it replaces dated and inefficient methods while preserving valuable traditions ; it rewards the innovative and energetic and punishes the merely connected ; it destroys the stability of the status quo while giving hope to the young and the outsider. true competition eliminates the need to plan, for as gravity guides water through the shortest path, competition naturally guides the economy to the most productive route. healthy competition is not just the best way to grow but also the best way to include all citizens ; what better way to get needed services to a poor housewife than to encourage providers to compete for her money? what better way to uplift a member of a backward community than for private employers to compete to hire her for a good job? healthy growth - inducing inclusive competition does not, however, emerge on its own. without intervention, we get the competition of the jungle, where the strong prey on the weak. such competition only encourages a certain kind of winner, one who is adapted to the jungle rather than the world we want to live in. in contrast, healthy competition needs the helping hand of the government ; to ensure the playing field is level, that entry barriers are low, that there are reasonable rules of the game and clear enforcement of contracts, and that all participants have the basic capabilities such as education and skills to compete. governments have historically found it difficult to ensure such healthy competition because intervention has to be just right. governments typically are tempted to go beyond intervening to create a fair competitive environment, and instead have turned to determining winners and losers themselves. this typically has not worked out well. with this caveat, the creation of a healthier, more competitive environment in india could be the government ’ s most important contribution to sustainable economic growth in india over the medium term. and the competition commission will be a central player in this endeavour. whether in questioning existing government monopolies or the excessive market power of private players, you will be a key institution in the

banking business away from regular commercial banks. we can debate this issue for a long time, or we can experiment by allowing a few payments banks and monitoring their performance. the rbi proposes to discuss further steps with stakeholders in this regard. if payments banks are successful, they will allow us to steadily reduce some of the obligations we impose on commercial banks. for instance, as payments banks hold government securities for liquidity purposes, we can reduce the quantity of government securities we ask commercial banks to hold as part of slr. while on the issue of bank obligations, there is an area where they do seem to be at a disadvantage vis - a - vis other financial institutions – in the raising and lending of long term money. this becomes especially important for infrastructure, where banks can be essential in early stage construction financing. since construction lasts for 5 – 7 years, banks should be able to raise long tenor money for these purposes. but if they raise such money today, they immediately become subject to crr and slr requirements, and any lending they do attracts further priority sector obligations. to the extent that banks raise long term bonds and use it for infrastructure financing, could we relieve them of such obligations? this will immediately put them on par with other financial institutions such as insurance companies and finance companies in funding long term infrastructure. the priority sector obligation will probably be necessary for some more time in a developing country like ours, though we need to deliberate more on what sectors should constitute priority as the economy develops. but even without entering this potentially contentious debate, can we allow banks to fulfil existing norms more efficiently? for instance, if one bank bis central bankers ’ speeches is more efficient at rural lending, can it over - achieve its obligations and then “ sell ” its excess to another bank that is an underachiever? we are examining such possibilities. finally, we have had only limited success in achieving inclusion when it is seen as a mandate. banks sometimes open branches in remote areas but the officers that staff them do not really reach out to the local population ; banks open no - frills accounts but many lie dormant. the reality is that if the mandate is unprofitable, banks will find ways to avoid them. not all forms of inclusion can be made profitable, but we should give banks the freedom to try new approaches, perhaps drawing in other institutions that can traverse the last mile to the underserved where necessary. the rbi will come out with new relaxations on business correspondents shortly.