Ladies and Gentlemen,

I am indeed delighted to be here today to launch the bicentennial celebrations of the State Bank of India. This year also marks the 50th anniversary of the conversion of the Imperial Bank of India into the State Bank of India. We therefore mark two anniversaries at the same time.

The State Bank - or SBI as it is popularly known - has become a household word across the length and breadth of our country. By doing so, it has demonstrated over the last two centuries, its resilience in adapting to the challenges of different times. Truly, it has emerged as a national institution, an institution the nation can be proud of. It is a tribute to successive generations of dedicated bankers that SBI has emerged as India's premier bank. I compliment the many generations of SBI managers, staff and workers who have, with their dedication and professionalism, built it into one of the most trusted and reliable banks in the world.

I hope that in the years to come SBI will grow to join the ranks of the world's biggest banks. You have the staff, the leadership, the brand equity and all other characteristics required to emerge as one of the world's top banks. You have the potential to take a giant leap forward. I hope such is the goal you will set for yourself in this bicentennial year. I wish you all success in your noble endeavours.

Friends,

Reading through the debate in Parliament in 1955, on the bill to convert the Imperial Bank into the State Bank, one is struck by the emphasis placed by all sections of the House on the development dimensions of banking. The development goals of the country needed a strong and diversified banking system, serving all sectors of the economy, reaching out to all sections of people in every nook and corner of the country. SBI led this drive to reach out to the hinterland and has spearheaded a silent revolution in banking. Today, it is a mirror of the Indian banking system and as the lead actor, it needs to perform the role of a trendsetter for the future.

It is well known that the financial sector plays a critical role in the development processes of a country. The process of financial intermediation enhances capital accumulation through the institutionalization of savings and investment. The gains to the real sector of the economy, therefore, depend on how efficiently the financial sector performs this basic function of financial intermediation. Banks form the core of the financial system in most countries and our country is no exception to this rule. Thus, how efficient a country's financial system is, depends to a large degree, on how efficient the banking system is.

In the last two decades, financial sector reforms have aimed at promoting a diversified, efficient and competitive financial sector. The ultimate objective is to improve the allocative efficiency of available resources and promoting accelerated growth of the economy and reaching out to the hitherto unbanked and underbanked sections of the society. More specifically, the financial sector reform programme has sought to achieve -

(i)Modifications in the policy framework within which various components of the financial system operate;

(ii)Improvement in the financial health and competitive capabilities by means of prescribing prudential norms which include, among others, capital adequacy as a major requirement; and

(iii)Improving the regulatory framework and financial infrastructure.

It is fair to assert that one of the most successful components of our reform programme has been in banking. Many observers familiar with the Indian banking system had fears that a banking crisis would envelop the economy in a cloud of non-performing loans. But the steady and phased approach to reforms has brought Indian banking out of the woods and I wish to complement the Governor of the RBI for steering the banks to this position of strength. New growth areas for lending have emerged in retail lending, particularly in home and automobile finance. If there is one aspect in which we can confidently assert that India is ahead of China, that is in the robustness and soundness of our banking system.

The first phase of banking sector reforms is coming to a close and we are moving on to the next phase. In the years ahead, the Indian financial system will grow not only in size but also in complexity, as the forces of competition gain further momentum and as financial markets acquire greater breadth and depth. As globalisation accelerates, the Indian financial system will also get more closely integrated with that of the rest of the world. This is apparent from the high degree of international interest in our banking sector.

However, to be effective, relevant and useful, the financial sector, and more particularly, the banking system, must respond to the changes in the real sector. In this context, one can point to four important facets of the changes occurring in the Indian economy -

i)The service sector is rapidly expanding. Today it accounts for nearly half of the GDP;

ii)The external sector is also growing, constituting as much as 25% of the GDP today.

iii)The economy has moved on to a higher growth trajectory, and to be sustained, this would require increasing investments in infrastructure; and,

iv)Despite the faster rate of growth of manufacturing and service sectors, bulk of the population still depends on agriculture and allied activities for its livelihood.

Provision of credit is one of the fundamental functions of banks. The effective discharge of this function is part of the intermediation process. The sectoral deployment of credit must keep pace with the changes in the structure of the economy. I had alluded to some of these changes earlier. The banking industry in India needs to keep these in mind and equip itself to be able to assess and meet the credit needs of the emerging segment of the economy.

In particular, I would like to refer to the need for banks to provide adequate long-term finance, particularly to small and medium industries. With the gradual disappearance of development banks in their original form, a gap in credit availability is emerging. There is some concern that adequate long-term finance is not available to medium, and more particularly small, industries. In providing adequate long-term finance to industry, two important changes are called for:

(i)we need to develop an active debt market in the country which will go to satisfy the long term capital requirements of large and medium industries; and,

(ii)banks should expand their credit portfolio to include increased provision of long term finance to small scale industries.

In this context,I must also emphasize the need for expanding credit to agriculture. While banks have achieved a higher growth in provision of credit to agricultural and the allied activities last year, the momentum must be carried further. In this context, it has to be noted that credit for agricultural and allied activities is not a single market. Provision of credit for high-tech agriculture is no different from providing credit to industry. Provision of credit to farmers with surplus is also of a similar nature. Commercial banks in particular should have no hesitation in providing credit to these segments where the normal calculation of risk and return applies.

It is only with respect to the provision of credit to small and marginal farmers that special attention is required. They constitute the bulk of the farmers and account for a significant proportion of the total output. In this context, a re-look at the organizational structure of our rural branches is called for. Apart from the need for empathy, rural branches must go beyond providing credit and extend a helping hand in terms of advice on a wide variety of matters related to agriculture. They must also establish links with input suppliers. We may have to think in terms of restructuring rural branches of commercial banks so that credit will be supplemented with extension and counseling.

As the task of the banking system expands, there is also need to focus on the organizational effectiveness of banks. For this, the initiatives will have to come from banks themselves. The areas which need improvement are known. Corporate planning, combined with organizational restructuring, are necessary to achieve improvements in productivity and profitability. A properly designed incentive system that improves productivity and encourages employees to deliver quality service must be clearly spelt out. There must be a vision to which employees can relate. Public sector banks need to be given greater autonomy in the management of staff and in determining their organizational structure. Greater accountability must necessarily go hand in hand with greater autonomy.

Innovation and customer service are going to be key drivers of success in the future. In an increasingly open and integrated world economy, commercial banks will need to develop an ability to respond to a wide range of expectations from customers, seeking different kinds of products and services. Depositors demand high levels of transaction efficiency; borrowers look for prompt, adequate and innovative responses; and finally, regulators expect banks to manage growth and diversification in a prudent manner. I believe we cannot achieve growth on a sustainable basis without a strong, stable and efficient financial system. While there is no single model for consolidation, the system must consolidate itself.

The challenge of the future is daunting. And it is here that I urge SBI to play a lead role. You should show the way forward to all our banks in widening and deepening the market for rural credit. You can take the lead in financing infrastructure development through innovative products and better risk management capabilities that can ignite a boom in Public Private Partnerships. You can, with your reach and spread, improve the geographical spread of credit - if necessary, by helping enhance credit absorption capabilities. You can ensure adequate coverage of small and medium enterprises. You have the skills, experience and the financial muscle to do so - and I hope that State Bank of India lives up to our expectations.

State Bank has the size and scale to lead India's charge into a new world. Size has benefits, but size alone does not guarantee benefits. You have to leverage your strengths, develop new capabilities and show enterprise and initiative to venture into uncharted territories so that you continue to be in the vanguard of India's growth in this century - a century which can very well be India's century. Your experience and enterprise will give courage to others. I wish you well in this journey of enterprise and creativity.