Friday 27 May 2022
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RBI governor warns against political culture of loan-waivers

At the same time, the RBI governor is confident that the banks and NBFCs can do well if they are efficient and properly governed

Reserve Bank of India (RBI) governor Shaktikanta Das today said that the policies of the central bank of the country were delivering results while the slow credit offtake was still the greatest of challenges the banks faced. Das was delivering the keynote address at the 13th Mint Annual Banking Conclave (ABC).

At the event themed on the role of the Indian banking sector in shaping the Prime Minister Narendra Modi’s dream of the country turning a $ 5 trillion economy, the RBI governor was not optimistic about what politicians do the economy, though. Without mentioning politics, he said, “Any kind of generalised loan waiver is credit negative and undermines credit culture. It affects the farmers’ capability to access the loan for the next time. Relief to farmers should ideally be targetted and specific to certain situations. It is very important that the amount of write-off is released immediately to banks.”

Notably, banks that suffer the loss of money that a government waives off are reimbursed, but that money arrives late. In the meantime, the lending banks get wary of sanctioning loans to the farmers because of the inevitability of the fate the sum meets, as seen in Indian politics over the years and decades. Thus, loan waivers do not prove good for the farmers in the long run either.

Opportunities and challenges for banks: RBI governor

Banks are, Das said on the subject “Banking landscape in the 21st century”, not only facing competition from fintech companies but also from large technology companies (Big Techs) which are entering into financial services in a big way. “The overhang of non-performing assets (NPAs) remains relatively high which is weighing on credit growth, the RBI governor said.

Das dealt with the issue of liquidity and banks’ power to manoeuvre while keeping the inflation-targeting job of the RBI in mind. “We started cutting the rates from last February. We acted in time: Das. If required then only we approach the government,” he said.

Das noted that the flow of credit to non-banking financial companies (NBFC) had stabilised. “We expect to have an integrated framework for resolution of financial firms operating in India in the near future,” the RBI governor said.

Recalling the year gone by, Das said, “2019 was a very unusual year but there are some green shoots visible.” Speaking of the recent progress, he said the Indian banking sector was slowly turning around on the back of improvements in asset quality with enhanced resolutions through the Insolvency and Code (IBC).

Responding to the concern in some quarters that India has been fiddling with its economic data since the advent of the BJP government led by Modi in 2014, the RBI governor said, “We take CSO (Central Statistics Office) data and have no reason to doubt the credibility of the data.”

Sharing a glimpse of the future as the RBI envisages, the governor said, “There are no preconceived ideas or conclusions on the roadmap on monetary policy. Our will not be an impediment in the growth of a bank.” However, he added that the banks would have to strive hard to stay relevant.

Banks have to, Das said, focus on two critical aspects: creating the required human resource skills (training, skilling and reskilling) and investing more on technology. “Banks will have to respond to emerging challenges. The business of banking has become all the more challenging now,” the RBI governor said.

Repeating what he has been stressing for months now, Das said, “It is very important for banks to focus on their operational efficiency. Prudent lending doesn’t mean you stifle your lending.”

That is where the RBI governor cautioned against bank managers getting wary of accumulating NPAs. “Slow growth of credit is the biggest challenge which the banks face,” he said, adding that the focus should be on prudent lending.

He noted that credit growth had moderated to 7-7.5% this year. “It needs to improve and we have taken steps,” the RBI governor said. “The most critical challenge for banks all over the world is slowing credit off-take. It affects the profitability of the banks, he added.

‘Banks can perform better if better governed’

“Governance is the critical thing that differentiates between a well-performing bank or NBFC from a not so well performing bank or NBFC. Regulations, supervision has to be robust. The idea is not to create unnecessary impediments in the operations of banks,” Das said.

To that end, said the RBI governor, “there has been a shift from reactive to proactive approach”. He said that the RBI was closely monitoring the top 50 NBFCs and then the next 50 NBFCs.

Dealing further with the plans of the central bank, Das said, “We propose to undertake thematic studies across financial entities. When you do supervision, you cannot focus on just one bank.”

The RBI has reorganised the regulatory department, the governor informed. He said the central bank’s regulations complied with Basel-III guidelines.

He noted that there has been a paradigm shift in the banking sector due to digital banking revolution.

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