The chief concern of the banking system should be the protection of depositor interests, and the debt restructuring scheme has been designed with a view to preserve financial stability, Reserve Bank of India (RBI) governor Shaktikanta Das said on Wednesday. Das added that while some economic indicators are showing signs of stabilisation, the recovery is not yet “fully entrenched”.
Speaking at an online event organised by the Federation of Indian Chambers of Commerce and Industry (Ficci), Das said, “You are calling it restructuring; we call it a framework for resolution of Covid-related stressed assets.”
RBI had to bear in mind the interests of depositors as also the historical experience of restructuring while coming up with the scheme, he observed. “…the primary concern of any banking system should be the protection of the depositors’ interest because ultimately, it is the depositors’ money. And, let me mention, that crores of people are depositors, whereas borrowers could be in lakhs. So the interest of depositors had to be protected,” Das said.
The aspect of financial stability of the banking sector also had to be borne in mind because banking has an important role to spur economic development in an emerging economy like India. Banks have a major role in the context of the pandemic as they are at the forefront of providing credit. So, on the one hand, RBI had to take care of the protection of depositors’ interest and the need to maintain financial stability of the banking sector. “We don’t want a repeat of the situation which India experienced four-five years ago, where the NPA levels of banks had gone up very steeply,” Das said. On the other hand, RBI is equally mindful of the fact that Covid has negatively impacted a large number of businesses, particularly those which have availed loans from banks. The scheme is meant to enable businesses which are otherwise viable, but have run into genuine cash flow problems because of a disruption in economic activity.
Das fielded a question on the differential rules applied to non-bank lenders and banks with respect to matters like branch expansion and the maximum loan-to-value (LTV) ratio for gold loans. The governor’s response was that after the blowout at Infrastructure Leasing & Financial Services (IL&FS) in 2018, the central bank has changed its approach to non-bank regulation. “With regard to NBFCs, RBI all these years followed a light-touch regulation policy. The regulatory policies of Reserve Bank were much more stringent in the case of the commercial banks, whereas in case of NBFCs, we had a concept of light-touch regulation, but then we had the unfortunate incident of the IL&FS crisis and the crisis which was created in the entire NBFC segment,” Das said.
Since January 2019, RBI has gradually been bringing in new regulations to govern the NBFC sector. The fragility and vulnerability of the NBFC sector is the main concern here and they are still not at par with banks in the matter of regulation. “We don’t want a repeat of the crisis in another NBFC,” Das said.
Despite substantial increase in the borrowing programme of the government, large surplus liquidity conditions have ensured non-disruptive mobilisation of resources at the lowest borrowing costs in a decade, Das said. In August 2020, the yield on the 10-year G-sec benchmark surged by 35 basis points amidst concerns over inflation and further increase in supply of government papers. Following RBI’s announcement of special open market operations (OMOs) and other measures to restore orderly functioning of the G-sec market, bond yields have softened and traded in a narrow range in September. Though bank credit growth remains muted, scheduled commercial banks’ investments in commercial paper, bonds, debentures and shares of corporate bodies in this year so far (up to August 28) increased by Rs 5,615 crore against a decline of Rs 32,245 crore during the same period of last year. “Moreover, the benign financing conditions and the substantial narrowing of spreads have spurred a record issuance of corporate bonds of close to Rs 3.2 lakh crore during 2020-21 up to August,” Das said.
He added that while some economic indicators are showing signs of improvement, the recovery may not have fully set in. High-frequency indicators of agricultural activity, the purchasing managing index (PMI) for manufacturing and private estimates for unemployment point to some stabilisation of economic activity in Q2, while contractions in several sectors are also easing.
“The recovery is, however, not yet fully entrenched and moreover, in some sectors, upticks in June and July appear to be levelling off. By all indications, the recovery is likely to be gradual as efforts towards reopening of the economy are confronted with rising infections,” Das said.