Good Evening. I took charge this afternoon as the
23rd Governor of the Reserve Bank of India. These
are not easy times, and the economy faces challenges.
At the same time, India is a fundamentally sound
economy with a bright future. Our task today is to
build a bridge to the future, over the stormy waves
produced by global financial markets. I have every
confidence we will succeed in doing that. Today I want
to articulate some first steps, concrete actions we will
take, as well as some intentions to take actions based
on plans we will formulate.
Before I turn to specifics, let me repeat what I
said on the day I was appointed. The Reserve Bank
is a great institution with a tradition of integrity,
independence, and professionalism. I congratulate
Dr. Subbarao on his leadership in guiding the Bank
through very difficult times, and I look forward to
working with the many dedicated employees of the
RBI to further some of the important initiatives he
started. I have been touched by the warmth with
which the RBI staff have welcomed me.
To the existing traditions of the RBI, which will
be the bedrock of our work, we will emphasise two
other traditions that become important in these
times: transparency and predictability. At a time
when financial market are volatile, and there is some
domestic political uncertainty because of impending
elections, the Reserve Bank of India should be a
beacon of stability as to its objectives. That is not to
say we will never surprise markets with actions. A
central bank should never say “Never”! But the public
should have a clear framework as to where we are going and understand how our policy actions fit into
that framework. Key to all this is communication,
and I want to underscore communication with this
statement on my first day in office.
Monetary Policy
We will be making the first monetary policy
statement of my term on September 20. I have
postponed the originally set date a bit so that between
now and then, I have enough time to consider all
major developments in the required detail. I will
leave a detailed explanation of our policy stance till
then, but let me emphasise that the RBI takes its
mandate from the RBI Act of 1934, which says the
Reserve Bank for India was constituted
“to regulate the issue of Bank notes and the
keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency
and credit system of the country to its advantage;”
The primary role of the central bank, as the Act
suggests, is monetary stability, that is, to sustain
confidence in the value of the country’s money.
Ultimately, this means low and stable expectations of
inflation, whether that inflation stems from domestic
sources or from changes in the value of the currency,
from supply constraints or demand pressures. I have
asked Deputy Governor Urjit Patel, together with a
panel he will constitute of outside experts and RBI
staff, to come up with suggestions in three months
on what needs to be done to revise and strengthen
our monetary policy framework. A number of past
committees including the Financial Sector Legislative
Reforms Commission (FSLRC), have opined on this,
and their views will also be considered carefully.
Inclusive Development
I talked about the primary role of the RBI as
preserving the purchasing power of the rupee, but we
have two other important mandates; inclusive growth
and development, as well as financial stability.
As the central bank of a developing country,
we have additional tools to generate growth – we
can accelerate financial development and inclusion.
Rural areas, especially our villages, as well as small
and medium industries across the country, have been
important engines of growth even as large company
growth has slowed. But access to finance is still hard
for the poor, and for rural and small and medium
industries. We need faster, broad based, inclusive
growth leading to a rapid fall in poverty.
The Indian public would benefit from more
competition between banks, and banks would benefit
from more freedom in decision making. The RBI will
shortly issue the necessary circular to completely free
bank branching for domestic scheduled commercial
banks in every part of the country. No longer will a
well-run scheduled domestic commercial bank have
to approach the RBI for permission to open a branch.
We will, of course, require banks to fulfil certain
inclusion criteria in underserved areas in proportion
to their expansion in urban areas, and we will
restrain improperly managed banks from expanding
until they convince supervisors of their stability. But
branching will be free for all scheduled domestic
commercial banks except the poorly managed.
There has been a fair amount of public attention
devoted to new bank licenses. The RBI will give out new
bank licenses as soon as consistent with the highest
standards of transparency and diligence. We are in
the process of constituting an external committee.
Dr. Bimal Jalan, an illustrious former governor,
has agreed to chair it, and the committee will be
composed of individuals with impeccable reputation.
This committee will screen licence applicants after
an initial compilation of applications by the RBI staff.
The external committee will make recommendations
to the RBI governor and deputy governors, and we
will propose the final slate to the Committee of the
RBI Central Board. I hope to announce the licences within, or soon after, the term of Deputy Governor
Anand Sinha, who has been shepherding the process.
His term expires in January 2014.
We will not stop with these licences. The RBI has
put an excellent document on its website exploring the
possibility of differentiated licences for small banks
and wholesale banks, the possibility of continuous or
“on-tap” licensing, and the possibility of converting
large urban co-operative banks into commercial
banks. We will pursue these creative ideas of the RBI
staff and come up with a detailed road map of the
necessary reforms and regulations for freeing entry
and making the licensing process more frequent after
we get comments from stakeholders.
India has a number of foreign owned banks, many
of whom have been with us a long time and helped
fuel our growth. They have been in the forefront of
innovation, both in terms of improving productivity,
as well as in terms of creating new products. We
would like them to participate more in our growth,
but in exchange we would like more regulatory and
supervisory control over local operations so that we
are not blindsided by international developments.
The RBI will encourage qualifying foreign banks to
move to a wholly owned subsidiary structure, where
they will enjoy near national treatment. We are in the
process of sorting out a few remaining issues so this
move can be made.
Finally, our banks have a number of obligations
that pre-empt lending, and in fact, allow what
Dr. Rakesh Mohan, an illustrious former deputy governor,
called “lazy banking”. One of the mandates
for the RBI in the Act is to ensure the flow of credit to
the productive sectors of the economy. In this context,
we need to reduce the requirement for banks to invest
in government securities in a calibrated way, to what
is strictly needed from a prudential perspective.
This cannot be done overnight, of course.
As government finances improve, the scope for such reduction will increase. Furthermore, as the
penetration of other financial institutions such as
pension funds and insurance companies increases,
we can reduce the need for regular commercial banks
to invest in government securities.
We also subject our banks to a variety of priority
sector lending requirements. I believe there is a role
for such a mandate in a developing country – it is
useful to nudge banks into areas they would otherwise
not venture into. But that mandate should adjust to
the needs of the economy, and should be executed in
the most efficient way possible. Let us remember that
the goal is greater financial access in all parts of the
country, rather than meeting bureaucratic norms. I
am asking Dr. Nachiket Mor to head a committee that
will assess every aspect of our approach to financial
inclusion to suggest the way forward. In these ways,
we will further the development mission of the RBI.
Financial Markets
Some see financial markets as competition to
banks. They are that, but they are also complementary.
Too many risks in the Indian economy gravitate
towards commercial banks even when they should
be absorbed by arm’s length financial markets. But
for our financial markets to play their necessary
roles of providing risk absorbing long term finance,
and of generating information about investment
opportunities, they have to have depth. We cannot
create depth by banning position taking, or mandating
trading based only on well-defined “legitimate”
needs. Money is fungible so such bans get subverted,
but at some level, all investment is an act of faith
and of risk taking. Better that investors take positions
domestically and provide depth and profits to our
economy than they take our markets to foreign
shores.
Together with the government and regulators
such as SEBI, we will steadily but surely liberalise our
markets, as well as restrictions on investment and position taking. Given the current market turmoil,
our actions will have to be at a measured pace, but as
a symbolic down payment, we will do the following:
1. Presently, exporters are permitted to re-book
cancelled forward exchange contracts to the
extent of 25 per cent of the value of cancelled
contracts. This facility is not available for
importers. To enable exporters/importers greater
flexibility in their risk management, we will:
i. Enhance the limit available to exporters to
50 per cent; and
ii. Allow a similar facility to importers to the
extent of 25 per cent.
2. Further to develop the money and G-sec markets,
we will introduce cash settled 10 year interest
rate future contracts;
3. We will also examine the introduction of interest
rate futures on overnight interest rates.
Rupee internationalisation and Capital Inflows
This might be a strange time to talk about rupee
internationalisation, but we have to think beyond
the next few months. As our trade expands, we will
push for more settlement in rupees. This will also
mean that we will have to open up our financial
markets more for those who receive rupees to invest
it back in. We intend to continue the path of steady
liberalisation.
The RBI wants to help our banks bring in safe
money to fund our current account deficit. The
Reserve Bank of India has been receiving requests
from banks to consider a special concessional window
for swapping FCNR deposits that will be mobilised
following the recent relaxations permitted by the
Reserve Bank of India. We will offer such a window
to the banks to swap the fresh FCNR (B) dollar funds,
mobilised for a minimum tenor of three years and
over, at a fixed rate of 3.5 per cent per annum for the
tenor of the deposit.
Further, based again on requests received from
banks, we have decided that the current overseas
borrowing limit of 50 per cent of the unimpaired Tier
I capital will be raised to 100 per cent and that the
borrowings mobilised under this provision can be
swapped with Reserve Bank of India at the option of
the bank at a concessional rate of 100 basis points
below the ongoing swap rate prevailing in the market.
The above schemes will be open up to November
30, 2013, which coincides with when the relaxations
on NRI deposits expire. The Reserve Bank reserves
the right to close the scheme earlier with due notice.
Financial Infrastructure
Finance thrives when financial infrastructure is
strong. The RBI has been working hard to improve the
financial infrastructure of the country – it has made
tremendous advances, for example, in strengthening
the payment and settlement systems in the country.
Similarly, it has been working on improving
information sharing through agencies such as credit
bureaus and rating agencies. I propose to carry on
such work, which will be extremely important to
enhance the safety and speed of flows as well as the
quality and quantity of lending in the country.
On the retail side, I particularly want to
emphasise the use of the unique ID, Aadhaar, in
building individual credit histories. This will be the
foundation of a revolution in retail credit.
For small and medium firms, we intend to
facilitate Electronic Bill Factoring Exchanges, whereby
MSME bills against large companies can be accepted
electronically and auctioned so that MSMEs are paid
promptly. This was a proposal in the report of my
Committee on Financial Sector reforms in 2008, and I
intend to see it carried out.
Finance is not just about lending, it is about
recovering loans also. We have to improve the efficiency of the recovery system, especially at a time
of economic uncertainty like the present. Recovery
should be focused on efficiency and fairness –
preserving the value of underlying valuable assets and
jobs where possible, even while redeploying unviable
assets to new uses and compensating employees
fairly. All this should be done while ensuring that
contractual priorities are met. The system has to be
tolerant of genuine difficulty while coming down
hard on mismanagement or fraud.
Promoters do not have a divine right to stay in
charge regardless of how badly they mismanage an
enterprise, nor do they have the right to use the
banking system to recapitalise their failed ventures.
Most immediately, we need to accelerate the
working of Debt Recovery Tribunals and Asset
Reconstruction Companies. Deputy Governor Anand
Sinha and I will be examining the necessary steps.
I have asked Deputy Governor Dr. Chakrabarty to
take a close look at rising NPAs and the restructuring/
recovery process, and we too will be taking next
steps shortly. The RBI proposes to collect credit data
and examine large common exposures across banks.
This will enable the creation of a central repository
on large credits, which we will share with the banks.
This will enable banks themselves to be aware of
building leverage and common exposures.
While the resumption of stalled projects and
stronger growth will alleviate some of the banking
system difficulties, we will encourage banks to clean
up their balance sheets, and commit to a capital
raising programme where necessary. The bad loan
problem is not alarming yet, but it will only fester
and grow if left unaddressed.
We will also follow the FSLRC suggestion of
setting up an enhanced resolution structure for
financial firms. The working group on resolution regimes for financial institutions is looking at this
and we will examine its recommendations and take
action soon after.
Households
Everyone has a right to a safe investment
vehicle, to the ability to transfer remittances to
loved ones, to insurance, to obtain direct benefits
from the government without costly intervening
intermediaries, and to raise funding for viable
investment opportunities. In addition, access to
credit to smooth consumption needs or to tide over
emergencies is desirable, especially for households in
the lower income deciles, when it does not impose
unserviceable debt loads. The Reserve Bank will
continue to play its part in making all this possible.
In particular, I want to announce a number of
specific actions:
First, households have expressed a desire to be
protected against CPI inflation. Together with the
government, we will issue Inflation Indexed Savings
Certificates linked to the CPI New Index to retail
investors by end- November 2013.
Second, we will implement a national giro-based
Indian Bill Payment System such that households
will be able to use bank accounts to pay school fees
utilities, medical bills, and make person to person
transfers electronically. We want to make payments
anywhere anytime a reality.
Third, only banks are currently allowed to
deploy Point-of-Sale terminals, and these are largely
set up by a few banks in urban areas. As announced
in the Annual Monetary Policy Statement, we will
facilitate the setting up of “white” POS devices and
mini ATMs by non-bank entities to cover the country
so as to improve access to financial services in rural
and remote areas.
Fourth, currently holders of pre-paid instruments
issued by non-bank entities are not allowed to
withdraw cash from the outstanding balances in their
pre-paid cards or electronic wallets. Given the vast
potential of such instruments in meeting payments
and remittance needs in remote areas, we intend to
conduct a pilot enabling cash payments using such
instruments and Aadhaar based identification.
Finally, there is substantial potential for mobile
based payments. We will set up a Technical Committee
to examine the feasibility of using encrypted SMS based
funds transfer using an application that can
run on any type of handset. We will also work to get
banks and mobile companies to cooperate in rolling
out mobile payments. Mobile payments can be a
game changer both in the financial sector as well as to
mobile companies.
This is part of my short term time table for the
Reserve Bank. It involves considerable change, and
change is risky. But as India develops, not changing
is even riskier. We have to keep what is good about
our system, of which there is a tremendous amount,
even while acting differently where warranted. The
RBI has always changed when needed, not following
the latest fad, but doing what is necessary. I intend
to work with my excellent colleagues at the Reserve
Bank, the senior management of which is represented
around this table, to achieve the change we need.
Finally, a personal note: Any entrant to the
central bank governorship probably starts at the
height of their popularity. Some of the actions I take
will not be popular. The Governorship of the Central
Bank is not meant to win one votes or Facebook
“likes”. But I hope to do the right thing, no matter
what the criticism, even while looking to learn from
the criticism – Rudyard Kipling put it better when
he mused about the requirements of an ideal central
banker in his poem “If”:
If you can trust yourself when all men doubt you, But make allowance for their doubting too:
Kipling’s reference to “men” only dates these
lines, but his words are clear.
We will fill in details of what we have announced
shortly, and lay out a broader roadmap of reforms
soon after. Appropriate notifications will be issued
shortly. As this is underway, we will turn to preparing
the mid quarter policy statement.
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