WEF 2024 | See clear improvement in risk management, governance practices of banks: RBI Guv

A: Now, I can't say how others are looking at India. But I think the journey has been quite challenging, almost for every country, especially in the last four years, which I have described elsewhere as the period of great volatility, and the volatility and the challenges on the global scale, are still continuing. So amidst all these challenges, I think India has navigated very well.

The various authorities, agencies, and in the case of the Reserve Bank, I think, overall, India has navigated well. In terms of macroeconomic stability, macroeconomic growth, in terms of financial stability, in terms of monetary policy actions and their outcome and bringing inflation under control, I think India is today well placed, it showed its resilience and India is well placed, and also well placed to deal with many emerging challenges.

But having reached this point, I think what is now the focus, and what is our continuing focus is to maintain that stability, maintain that resilience and work towards improving it and strengthening it further. India is on the whole doing well, and will continue to do well as per the current indications.

A: You see; all these global geopolitical flashpoints are evolving. Around the Red Sea region, how it will evolve in the coming days, we have to wait and see only the time will tell. As things stand today, India will be able to deal with the existing challenges, but we have to see how it all plays out in the future weeks or months. And this kind of uncertainty, I think, is what is making policy making really that much more complex.

A: I think you have partly answered the question, you see the markets all over the world, the markets are running ahead of the thinking of the central banks. In India, you mentioned that there is an expectation from various quarters about rate cut and all that, frankly, speaking the serious players in everywhere, whether it is the industry or the private sector, or it is the analysts or the economists or the market players in the context of India, I don't think anybody is expecting a rate cut now.

In most of the advanced economies, the markets and the stakeholders and the market players, their assumptions, it is ahead, they are over running their central banks. So far as India is concerned, I think the thinking of the central bank and the thinking of the market participants, they are much better aligned. With regard to inflation, I have said elsewhere that our policy has to remain actively disinflationary till we reach the target of 4% on a durable or sustainable basis, and that is our current stance.

You see, ultimately, why are we working towards this 4% inflation, because a stable inflation, a stable what we call price stability provides the support, the required support. It acts as a bedrock for growth for sustainable growth. Otherwise you will have off-and-on data of growth being well, then again, slipping back. And a premature, you are right, absolutely right in saying that any premature pivot in our policy, it can be very, very costly for the economy.

A: You see, we said 7%, for the current year, our earlier projection for the current year that is 23-24 was 6.5%. At end of October, when I said in one of the events and followed up by our monetary policy statement, when we said 7%, our previous number was 6.50% and I think the market was also around 6.50%. That time 7% was seen as optimistic. But subsequently, the NSO that data which came about a month later, so naturally, they had a later period data, and NSO has access to several data to which we don't have access. And in fact, in the Monetary Policy conference, we had said, I think the deputy governor had said that it's actually 7% is a conservative estimate. So we were expecting that it can exceed 7%. But we want it to be absolutely sure about our number.

Even for next year I have said yesterday that the momentum of economic activity is well maintained and next year growth will be touching 7%. And when that happens for four consecutive years, successive four years, India would have recorded a growth of 7% or more.

A: We are confident, unless I am confident I will not say I don't speak about it.

A: You see our deposit growth, if you see the last one or two years, the deposit growth has been around 12 to 13%, the credit growth has been about 15%. Now, obviously, you see it's not that you get X amount of deposit and you extend that X amount as loan. It's not like that, each loan that you extend money creates money, the money multiplier happens in the market. So obviously, the credit will always be a little higher.

Now the question is whether it is unduly higher or it is sort of has a co-relation with your deposit base. At the systemic level, at the individual entity level, at the moment we don't see any risks. Our supervision has become much more intense. Our supervision is ongoing, it's not once in a year, annual inspection or annual supervision of the banks. So, at the moment the Indian banking sector, at the systemic level is very robust, even at individual entity level, it is very robust.

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With regard to stock prices, you see stock markets have their own dynamics and the share prices do not necessarily reflect the fundamentals of a company. I am talking in general terms not with reference to a particular bank. Generally, if you see the stock prices are determined by so many other factors and do not necessarily reflect the fundamentals of a company. You have examples in every sector, whether it is the financial services or banking or any other sector you look at there are companies with very strong fundamentals, but its share prices would be low and the converse also happens. So, therefore, it will not be correct to judge the health of a particular sector like banking in particular in terms of movement of share prices and that too on a single day.

A: We have not mandated any number. But what I would like to say very clearly is that we have not mandated any number, that this shall be the credit deposit ratio and at the moment we don't propose to. Because credit deposit ratio is just one of the parameters to assess the health of a bank, there are several other parameters. So, you have to look at it all in totality.

All that I can say is that there should not be exuberance in lending, number one. Number two, there should be some correlation between your deposit base and your credit growth. There should be some correlation, but in terms of hardcoding, it in terms of a particular number, there is no such proposal in our mind and we have not prescribed any such number.

A: You see not at the systemic level, not with regard to overall credit, we saw some signs of it in, with regard to the personal loans, especially the unsecured loans, we saw also some amount of with regard to the interconnectedness between the banks and the non-banking finance companies (NBFCs). So, at the sector, not even at sector, I think sub sector level, in places where we saw a possible build-up of exuberance or a possible build-up of stress, we have already acted. In November, we have increased the risk weights and we have acted. But the numbers as they prevailed today are actually not bad, the numbers are okay. But we have acted pre-emptively.

We felt that if we allow this to continue, and if left on unattended, this can create a potential situation of stress. So we were dealing with a build-up of stress, a possible stress from actually materialising. So it was a kind of a pre-emptive action to prevent, the kind of your fear of missing out or a kind of what could have become a possible exuberance.

A: You see we are monitoring almost every aspect of the banking and credit space of the entire credit ecosystem. As and when something becomes necessary, we will definitely act. Our endeavour is always to take pre-emptive and proactive actions.

A: This decision is the result, is the culmination of more than one year of keeping track of the developments in the AIF sector. It's not as if suddenly we something came to our notice and we acted. We have been tracking these developments for about more than a year now. And initially, we saw some signs here and there. So, when we see some signs here and there, we try to deal with it on entity based approach, our supervisors take it up with that particular entity and try to deal with it on a bilateral basis. But when we see something showing signs of getting widespread, we had to act.

A: I can't again quantify it, but there was this whole issue of ever greening that was taking place. So, therefore, that had to be prevented. All that we have done is that we have not stopped any lending, we have only said that if you want to continue you treat it as you treat it in a particular way and you provide for it in your accounts. And so, that is what we have said and some representations have come there and they are being examined.

A: I can’t say, it is being examined, we have got number of representations. They are being examined. And with regard to the decision, it's a well thought out decision to prevent a kind of a new source of stress or a new source of problem for the Indian banking sector. Please remember what was the health of the Indian banking sector 10 years ago, and where it is today.

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In fact, the gross non-performing asset has reached an all-time low of 3.2%, the profitability of banks are very good. The capital at adequacy of banks are about 16.8%. And our stress tests also show that even under severe stress scenarios, the banks will be able to maintain their minimum regulatory capital. So, we have to be therefore, very careful, the banks have to be careful, the banks are careful, I see a clear improvement, I see clear improvement in the risk management practices and in the governance practices of the banks. But more needs to be done and we are working on that.

A: NBFC sector is definitely far better and the numbers in the NBFC sector are also very positive. They are also I would say, quite robust and particularly the bigger ones, after the scale based regulation, as we have different regulations for depending on the size and complexity of the NBFCs. So, NBFC sector parameters are also looking good.

Again, they have recovered in the last four years in the post IFLS scenario, they have recovered very well. In 2019 when I joined Reserve Bank, two, three months after the ILFS crisis, end of 2018, and the whole of 2019, there was a crisis of confidence, there was a lack of trust on the functioning of NBFCs. And I am happy to mention here today that both as a regulator, we work very constructively with the various financial sector entities and with the sector as a whole. So as a result of the efforts of the Reserve Bank, and the efforts of the individual, particularly the large and the medium size NBFCs that sector is today, much healthier than it was earlier.

A: There are three things that I would like to mention, one is that there are NBFCs and also there are banks, which do lending through digital means. So, there are NBFCs, which are primarily focused on digital lending. Now, that was a growing sector and that needed to be properly regulated, and the regulatory architecture had to be defined. So therefore, we appointed a committee, the committee gave its recommendations, the discussion paper was put out, we got the comments. We had wide ranging consultations and we have issued detailed guidelines for the digital lenders in the digital lending space.

In fact, when we did that, there was some amount of criticism that RBI was trying to stifle activity in this sector, but let me tell you, that the fact that it is now regulated by the Reserve Bank and there are clear regulatory guidelines, it has increased the trust of the investors. So, there is this greater investor confidence on digital lending, that is the first thing we have done.

With regard to fintech companies, they are not lenders themselves, that but they provide technology solutions to lenders, and they come out with products and they act as third party service providers to regulated entities of the Reserve Bank, like the banks and NBFCs. There also we have issued instructions to NBCs and to the banks with regard to the code of conduct and with regard to the practices that should be followed by their third party service providers, and the bank that is a regulated entity of the Reserve Bank, whether it's a bank or NBFC so far as we are concerned, he will be accountable and to that extent, he has to regulate the fintech companies.

But the way and the fintech companies are growing exponentially they should grow after all modern times belongs to technology, RBI, we are clearly focusing on supporting technology, encouraging technology, at the same time, we want to sort of have well defined parameters, where it evolves in the right direction. Without creating any potential stress and keeping in mind the interest of the consumers, the interest of the customers, in terms of interest rates, in terms of safety of their money. So, therefore, we have thought about this the self-regulatory organisation (SRO), which will be an intermediary body between and there could be more than one SROs whether we should have a single one or multiple ones, if multiple, then how many should be is a part of a discussion paper which we have just uploaded, released very recently on the SRO in the fintechs sector.

Our idea is that this self-regulatory body will have the fintech companies themselves as its members and they will act as an interface between the Reserve Bank and the fintech companies and certain amount of code of conduct, business ethics and certain business practices, certain minor details can be left to the SRO to deal with, under the overarching principle based regulation, which we will prescribe. Then the SRO also will be closer to the fintech players, he will be in a position to have a better sense of how technology is evolving, and he will be able to keep us also apprised that this is the direction in which things are happening.

So therefore, on the whole to, sum up a long answer, our effort is mainly to see that the fintech ecosystem grows and grows in a robust manner in India, but it should grow in a proper regulated environment, so that the interest of customers are well protected. And it's a kind of a sustainable growth, which is achieved, not that one off kind of growth which happens and then suddenly it crashes. The growth of that sector has to be sustainable.

A: There's a clear difference between the underlying technology of the so called cryptocurrencies and the cryptocurrency as a product which is basically a speculative product.

The underlying technology has been there and will be there. We are using blockchain, for example in our central bank digital currency (CBDC) trial project. Blockchain has many applications, it will grow, it needs to grow, we are using it, there are many users who are also using it.

Tokenization also needs to grow. It will facilitate what you call a large value asset, an ordinary individual who doesn't have the affordability can become a part owner of a high valued asset, that is what blockchain will facilitate, that is what tokenization will facilitate. So that is the technology part of it and it needs to grow. But the product, which is bought and sold in the market, which is traded, it is a highly speculative activity and has got several downsides which can pose risks to financial stability. So we need to clearly differentiate, technology has to grow, but we have problems with regards to the product or what is called cryptocurrency. It is a speculative product, and it is being sort of marketed as an asset….

A: It's not an India problem, it's an emerging market issue. They should keep in mind the fact that emerging markets have to ultimately protect their own economies. You have volatility in the international markets, in the financial market, you have volatility in the most powerful currency, the dollar index at one stage went up to about 114, then it came down to about 101, now it's holding around 103 and all this has happened in the last two years. So see the volatility there. Now, if that volatility translates and causes equal amount of volatility in the emerging market currencies, where will they go? What is the safety net that emerging market economies have? So emerging market economies have to sort of build up their own strength and build up their own buffers.

In Reserve Bank of India as a part of our explicit policy, we have embarked on strengthening and building up higher reserves, our reserves are around $620 billion at the moment. So individual emerging market economies have to insulate and protect their economies from the spill overs of the global currency movements and the fluctuations. They have to ensure stability of their currencies. And by stability, what I mean is that, undue volatility has to be prevented.

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The Reserve Bank of India’s intervention in the currency market is only to prevent excessive volatility. This has been the stated policy of RBI for so many years and I would like to reiterate that, that continues to be the policy of RBI.

The stability of the Indian rupee if you're trying to measure the stability, the question is what time period you look at? You pick up 11 months and say that during this period the rupee has remained stable, yes, it has remained stable. But why the rupee has remained stable, please do a deep dive and do the analysis. Rupee has remained stable, because of India's strong macroeconomic fundamentals, because of stability of the Indian financial sector, because of return of foreign capital inflows, the foreign portfolio investment (FPI) inflows have increased it's about $32.5 billion this year on net basis, foreign direct investment (FDI) is about $10 billion and India is one of the larger recipients, our external sector is also very robust. So with a forex buffer the investors have greater confidence on India's ability to service its external obligations with all this confluence of factors naturally the rupee has remained stable.

You have to recognize the ground reality, you cannot just pick up 11 months and say that rupee has remained stable, you look at the two-year horizon- after the Ukraine war in 2022, the rupee depreciated by about 10%. So, if you look at a two-year horizon, the rupee depreciation is about 4%-5%. And historically, if you see even over the last five years or 10 years, the annual average depreciation of the rupee has been about 4%-4.5%. Even now the annual depreciation is 4-4.5%.

So, what we are doing is that we would like to say and impress upon the IMF or for that matter, any agency to look at these ground realities and realize and appreciate the challenges which emerging market economies on the whole face. Their priority is to protect their domestic economies; you cannot take away that right from these countries.

A: Capacity utilisation of the manufacturing sector has reached now 75% and capex is happening in several key sectors.

The government capital expenditure has been quite strong in the last five years, that is continuing to drive growth, that is also generating private investment.

Credit growth in India has been very robust, of course, large part of it is going into the retail part of the lending. But if you talk to the leading banks in India, they are also seeing lot of business interest and lot of active proposals for lending for capex.

However, capex is actually happening in certain core sectors like steel, cement, petroleum, and I should say, agricultural products. A lot of capex is also happening in startups and in the fintech companies. So, that cycle has started.

A: We are very actively supervising. The entire supervisory method of the Reserve Bank, over the last four or five years, there has been a paradigm shift. And as in when we see any stress anywhere or any risk anywhere, we will act.

A: It's a moving situation. Let's see.

A: Every new challenge looks bigger than the previous one, let me put it that way. In 2019, the scenario which prevailed in the NBFC sector with crisis of confidence in that sector, activities had come to a standstill, that appeared to be a very big problem. But then you had COVID and its fallout, then you had Ukraine war, then synchronized monetary policy tightening, now the new flashpoints in geopolitics, in supply chains. So therefore every challenge looks actually bigger than the previous one. We have to remain prepared to deal with such challenges. For a central bank, it's never a dull moment. And our endeavour is to sort of live up to the expectations which people have from us, and our effort and endeavour is always to live up to that.

One thing, which I think I can say, with confidence, what the Reserve Bank has been able to achieve over the last five years is to bring about financial sector stability and also contribute to macroeconomic stability of the country.

A: I think it's not appropriate for me to comment on the budget. In general, I think at the moment economic growth momentum continues. Overall economic activities are maintaining their momentum and that's why we have said that 2024-2025 we expect a growth of 7% in the next financial year.

So, the growth has to be sustainable, the rate of growth also has to improve and it is happening. The potential growth of the Indian economy is also steadily rising.

Our potential growth was about 6% or so, in the year of the COVID. Then some research paper published by the RBI researchers talked about the potential growth of India being 6.5%. But now, the growth for the last three years, including the current year and next year, hopefully, we do believe that it will be 7%. If that happens, it will be four years of 7% growth, so, actual growth is therefore, running ahead of the growth potential. So, therefore, we expect India's growth potential also to move towards 7%.

A: I will not say I'm excited about, but I can say that I see some very positive signs about growing confidence on India, growing expectations from India, that it will be a country which will perhaps play a bigger role in global growth, expectation that India will provide the necessary momentum to world growth also.

The IMF has projected that India's share in global growth will go up from the current 16% to 18% by 2028. So, therefore I cannot say that I get excited- I'm not excited over everything, one has to maintain that amount of equanimity, more so in a central bank. But I think there is growing interest on India, there is growing confidence on India, there is growing expectation that India will play a bigger role in the global economic growth.