Gautam Dalal : From Thought To Implementation

Gautam Dalal

Chairman & CEO, KPMG

Consistent with recent times, the credit policy is no longer seen as an event but part of the overall action plan of monetary policy and banking market regulation. The key indicators like growth and inflation, are within the right range despite the significant negative events like 9/11 and the Gujarat riots, over the last year.

The RBI has continued the softer interest rate regime using almost all the tools at its disposal. However, it has probably been short on market expectation on the bank rate.

RBI has a number of initiatives for further development of the Indian debt markets, including evaluating the introduction of rupee derivatives. The rupee options when introduced will broaden and deepen the foreign exchange market and allow hedging of contingent exposures at a lower cost. Steps towards allowing short selling would further assist in developing the market.

One area that could have been tackled is the savings bank rate. This is a politically sensitive and emotive area, and whilst the deposit and bond yields have dropped in the last two years, the savings rate has been left untouched.

It has been well established that softer interest rates do not necessarily result in credit offtake, and the credit delivery mechanisms and industrial demand will need to improve for an increase in credit offtake.

The RBI is committed to implementing risk-based supervision and has in the last few months issued guidelines on credit and market risk. Draft guidelines for consolidated accounting and consolidated supervision are being finalised. Risk management is an area of much needed focus in the Indian Banking system and the actual progress made in effective implementation of these guidelines is a high priority.

The recognition of true NPA in the accounting sense is the focus of a working group which is benchmarking current practices and suggesting changes in tune with international practices (eg US GAAP).

The true recognition of the problem supported by the recently promulgated Securities Ordinance will assist in dealing with the structural problems with the lending books of many banks provided Parliament passes the ordinance.

The RBI has also a Consultative Group for strengthening the Internal Supervisory Role of Boards of Banks. Whilst the recommendations would need to be looked at, corporate governance plays a crucial role in the healthy functioning of banking institutions.

The role of independent directors and the quality of decision making and integrity of the system would be crucial in the context of enhancing shareholder value and avoiding some of the fiascos in recent times. Further guidelines on the local of foreign bank branches is awaited. A push facilitating bank consolidation would have been timely.

Overall this policy is a clear signal of the central bank commitment to maintaining a soft interest regime. There are many irons in the fire as evidenced by the number of Working Groups that are deliberating various issues. The challenge is in managing the change through speedier delivery from thought to implementation.