INSUBCONTINENT EXCLUSIVE:
There is a case for banks to show better monetary policy transmission, RBI Governor Shaktikanta Das saidReserve Bank of India Governor
Shaktikanta Das gave his first interview with media since taking office in December
Here's an edited transcript of the topics he covered in the more than 50 minute interview.On the economic slowdown and the RBI's
response:"The accommodative stance will depend on incoming data
How inflation numbers look how the growth numbers look
Primarily how inflation looks
With regard to the slowdown, I would not give a particular timeline and it's not possible
But overall if you see the trend, I think the fourth quarter of last year was partly a base effect and partly due to investment slowdown and
demand contraction, which I had articulated in the monetary policy committee minutes
For that, so far as monetary authority is concerned, the law gives us a certain role and mandate and we have tried our best to play that
We have reduced the policy rates by 75 basis points and we have shifted to accommodative
And shifting of the stance to accommodative itself means a rate cut of 25 basis points at least
So therefore effectively, the rate cuts has been 100 basis points if you take into account the change in stance."On providing
liquidity:"Parallel to that we have also ensured surplus liquidity in the system
Liquidity was in deficit but at the moment for the past 1 1/2 months, the system is in liquidity surplus by more than 1 trillion rupees (1
lakh crore).""We will ensure the banks are provided adequate funds
While the system is in surplus mode, it is possible that one or two banks may have liquidity issues
Given the role the RBI is assigned, inflation is primary target, and given due weightage to the fact that growth momentum has slowed down
For the revival, various stakeholders have to play the role."On investment slowdown:"There have been sectoral problems, like in the auto
Our survey shows that additional insurance requirements has had an impact
So every sector has had its problem
But when the world is changing you also have to change
Then there was the credit squeeze; now availability is there
The banks were unable to lend significantly, burdened with NPAs (non-performing assets) and the focus of the banks was on recovery and
consolidation and not on credit
The banks are now in a better position to lend
While banks were not lending, NBFC entered their space
But for a year or so, credit flow has been affected
Another thing I would like to address the crowding out effect
It's a good thing that the fiscal deficit has been brought down and recapitalization has been announced
Every stakeholder, the government, the private sector and the RBI are playing their role and I think things are moving in the right
And things should improve now."On liquidity and NBFC problems:"We have to constantly monitor and remain alert as the regulator and as a
We have to analyse and review the situation
Here at the RBI, we have broad medium and long-term goals
If some issue becomes critical, not a day passes without some internal high-level review
On NBFC, not a day passed in the last several months where we don't have a discussion or a review internally
Either on the sector or individual NBFCs
And we are monitoring the top 50 NBFCs which we have identified in terms of balance sheet size, volume of operation and in terms of
governance practices and credit behavior
Our supervision teams are closely monitoring them
We are in constant interaction with the banks and it's our endeavor to ensure a collapse of another NBFC, especially a large one, doesn't
Having said that, if NBFCs have undertaken certain governance practice and certain ways of function and they have to a price for it, they
will have to pay a price for it."On banks being proactive:"We are in constant engagement with banks
After the June 7 circular, the banks are more enabled to resolve the crisis and stress in the individual NBFCs
Now inter-credit agreement is mandatory
We have also given 30 days for review and another six months for restructuring and we are having constant engagement with the banks
So the banks, under the June 7 circular, have to play a proactive role
We are constantly in touch with large lenders to such NBFCs, including some housing finance, where we see some signs of
fragility."Consolidation in NBFCs:"If somebody has diverted or there has been sort of ever-greening, there has been gold plating, if there
has not been so diligent lending, so obviously they have to pay the price
Our effort is to segregate the way there have been lapses
Our focus is the overall system maintains stability
When I say system, it obviously includes all the major players
Therefore, our effort is to see that there is no repeat instances of systemically important large NBFC collapsing
And in the process some promoters have to make certain sacrifices, promoters have to accept haircut, the banks will have to deal with it
appropriately within the parameters
One or two cases, the banks have signed inter-creditor agreements and they are resolving this crisis
The way I look at it, the responsibility is on the NBFCs themselves, to find market instruments to resolve their problems
Market instruments and the promoter has to bring in additional capital, he has to do a stake sale, he has to securitize his assets and
mobilize liquidity, he has to meet debt obligations
And then the role of the lenders
We are in discussion with the lenders who have to protect their money also
They also have a parallel role to try and resolve this issue
That will also mean sacrifice on the part of the promoter also
The RBI will ensure adequate liquidity to banks."On refinancing:"This Refinance window or a liquidity window is a misnomer
We cannot lend money directly to one NBFC
Under the law, RBI is the lender of last resort, but we haven't reached that situation where we invoke that particular legal provision
So RBI in today's time cannot and would not be lending directly to NBFCs
We cannot give them clean money
It is up to the bank and depending on the collateral
We are backing up the banks
There is nothing called a liquidity window
Money is fungible, and when money is fungible having these windows, I think, is not relevant."When will the crisis be over?"Difficult to say
It's our effort to ensure there is no contagion
It is our endeavor to ensure there is no collapse of another systematically important NBFC."On cases of adventurism:"There have been
instances where it has happened
Some of the NBFCs have diverted
It hasn't happened in a large scale
In some cases, we have noticed this has happened
A large number have encountered business failures, encountered external factors, which has impacted business models
We are coming up with a new regulatory framework
We are a work in progress
Risk management guidelines are also there for NBFCs
Now HFCs are coming under RBI, we are constantly reviewing it internally
The RBI's endeavor is a well functioning NBFC sector and a robust regulatory framework which prevent the kind of situation we have
encountered in the past year."On the United States -China trade war and what it means for India:"India is not part of the global value chain
So, United States -China trade tension does not impact India as much as several other economies which are part of the global value chain
Second thing is about trade tensions, it has a lowering of global growth and contraction of demand and that would in a way have a role on
Oil prices should remain low
In the long run, we cannot ignore lingering and prolonged tensions
It will definitely affect countries all over the world and definitely India, which is the sixth-largest economy
In the medium term also it will affect India
If it lingers, a contraction of global demand will have impact on our exports sector
We have large exports to Europe."On RBI policy options:"We have to only see our domestic demand continues to be robust and ensure that there
is a domestic demand revival and that remains strong
We have to ensure that these opportunities arising out of the trade war, relocation of investment, India should utilize it
Irrespective of the trade war, India should become competitive both in the services and the manufacturing sector."On the risk of dollar
depreciation:"If they depreciate their currencies, it means greater inflows
When the reversal happens we have to manage spillover effect
If excess inflow comes in, it becomes a problem to absorb excess liquidity
It's an evolving challenge
We will continue to deal with it
We have to keep in mind, in several advanced economies, bonds yields are negative, inflation is zero
In fact in my interaction with other central bankers, they are concerned about zero or low inflation
They would like to have a slightly higher inflation
Zero interest rates prevailing for far too long, it becomes unsustainable and undermines investor sentiment
In the overall context, India is much better than most other economies."On structural reforms:"I don't think the fiscal space is really the
If you have fiscal space any government can use
Long-term growth can be sustained by structural reforms, enhancing competitiveness, and focusing on an enabling business environment
So therefore, GST, IBC and the Niti Aayog's committee on agriculture reforms, which will allow private investment in the farm sector and
which will ensure better price to farmers for their produce, are crucial
The supply chain in the agricultural sector has to be addressed
The focus will have to be on structural reforms and improving competitiveness
Focus will have to be on continued ease of business and availability of credit at a reasonable price."On improving growth prospects:The
RBI's "essential role is to maintain price stability, which is defined in terms of inflation
Along with the objective of growth
It will depend on inflation, on incoming GDP
This year we have projected 7 per cent
There was a lot of uncertainty, but now the monsoon is catching up in Tamil Nadu and Kerala
The western part had good rains and the monsoon outlook has improved compared to what it looked about three weeks ago and oil prices are
remaining in the $65 range, but then you have extraneous factors like the trade tensions, sanctions on Iran, and then you have Brexit which
creates uncertain sentiments and India has a lot presence in Britain in terms of investment and exports
I would not like to specify how long it (economic slowdown) will last
India is today in a far better place than most of the major economies and India has certain inherent resilience and the signs are looking
good."On core inflation:"Core inflation coming down, at one level, can be seen as a positive development but at another level it is
reflective of a slowdown in the demand, so therefore I don't want to make a qualitative judgement on good or bad
Based on hard numbers, we will have to take a call."On global bond issuance:"RBI is the debt manager
There is a process of consulting between RBI and the government."On recapitalization funds:"The Rs 70,000 crore is adequate for capital
requirement but also for growth
The true test of efficiency of a public sector bank is whether they are able to access capital markets to raise additional capital
Otherwise just continuous and prolonged dependence on government capital infusion -- it can breed inefficiency
Banks need to access capital markets
There has to be competition in the banking sector
How many competitors are there in the field that the market will decide."On interest-rate transmission:"There is a case for banks to show
better monetary policy transmission
We have to keep in mind that banks have gone through a period of crisis and they are just recovering, they are just about recovering, so
that aspect has also to be kept in mind
So if you drive and ask them to fix interest rates administratively, we cannot lose sight of the fact that banks will also have to recover
and comeback to a level where they are out of the woods
If we see the PCA banks have fulfilled the conditions to come, they will come."On payments banks:"Some are doing well
We should wait a little longer how they play out."On financial stability:"I would like to say our primary focus -- apart from price
stability and keeping the objective of growth -- it is also to ensure the stability of the financial sector, which includes banks and NBFC
And in the long run, if India has to grow and show improved growth rates, it will need a well-functioning financial sector."Get Breaking
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