'Banks should be cautious of technological risks', says N S Vishwanathan

At a time when the health of the Indian banking system seems robust, N S Vishwanathan, former deputy governor, Reserve Bank of India (RBI) and Chairperson of College of Supervisors, cautioned bankers from celebrating too early while also calling for the need to sustain the current performance. Edited excerpts from his Fireside chat with Business Standard Consulting Editor Tamal Bandyopadhyay:

Do we need to take cognition of what’s happening in the US and can it impact us?
 

In the banking system, the time for liquidity risk to become a solvency risk is very little, it’s too quick, the serviceability liquid moves to solvency risk. The moment you have a liquidity risk, you have to raise money at a loss. Liquidity risk is something we don’t let it happen in India and we must thank our regulators for that. I don't think the financial system issues that are there in the US will have an impact on the Indian banking system directly.

Is the RBI more proactive than other central banks? In India also, there have been cases like that of YES Bank. What is the new regulatory landscape like?
 

The interventions (by RBI) did not take place after the problem. In all the cases, the interventions were made at the time the problem was seen; it was anticipated by the RBI.

RBI today has a lot more technological capabilities, both in terms of hardware, and the kind of people that it has recruited —with IT background. RBI now has the ability to look at what’s happening in the bank, on the basis of the information that it has on an ongoing basis. RBI has been taking a series of measures to prevent any accidents. It had introduced risk-based supervision in the past, but the quality of information that RBI is collecting now has improved.

RBI has held meetings with the boards of public sector banks and private banks. Is there any concern on governance, ethics and independence of directors… is there a lack of trust?  
 

When you have a larger financial system, then there are issues that are coming across the board. I think RBI is sensitising the board members to be aware and alive to those problems. It is a step towards being proactive in nature. Maybe they are looking at issues in the perspective of risks that are emerging within India and outside that could spill over to the Indian banking system and sensitise the boards about it.

Do you believe that things have changed in Indian banking in terms of underwriting, risk management and compliance? Is it better post AQR (Asset Quality Review)? Is it a new regime for Indian banking?
 

AQR facilitated RBI to understand how a borrower behaved across the banking system. The quality of assets is a function of internal processes. It is also a function of credit culture, and credit culture is influenced by many external factors. In the retail segment, the improvements in the credit information system boosted the repayment culture. I think CRILC (Central Repository of Information on Large Credits) and the IBC (Insolvency and Bankruptcy Code) have also created an improved credit culture in the corporate segment. Growth in unsecured advances is very high. Obviously, the banks have to look at it very closely. But I would have been more worried if I had seen this 10 years ago. Today, there is a lot more information and fintechs are able to source data, providing a much better appraisal of a potential borrower. I had said earlier that don’t join the retail segment banking bandwagon. This is because the bandwagon problem is a huge issue because we need systems in place.

RBI had come down heavily on a bank with relation to arrangements with digital players. How real is the cyber risk here and in digital lending?
 

The problem was the use of fintechs to source business. While the fintechs were supposed to be agents, they almost became lenders. So, they became front or the banks became back office for them in a way. They were in an unregulated space. So, if somebody from the unregulated space is entering the financial sector, and blurring the line between banking, business, finance sector, business and technology business — that is a worry for RBI. That is why we saw the digital lending guidelines. Second, the increase in reliance on technology for everything leads to susceptibility of data being leaked and frauds based on that. RBI is giving a lot of emphasis on the risks surrounding IT systems and cyber space-related activities.

On every parameter, the results of banks have been good in the March quarter. In the Indian banking system, something is unbelievably good. Will this run continue, or are there any pockets of concern?
 

It is nice that the banking system is in the kind of health that the numbers are depicting. Is it again a case of too good to be true and sustainable? It is a little early to call it too good to be true because I thought it was too bad in the past. We are moving from too bad to normal. This has not happened overnight. This has happened due to certain very clear actions. The AQR was one of the most seminal steps that the RBI took. The IBC process and PCR (provisioning coverage ratio) are also important examples. For a long period, several banks were even kept in prompt corrective action (PCA framework). These steps imbibe a sense of caution in the banks. Sustainability of this is linked to how the internal system continues to remain robust and that optimism does not turn into irrational exuberance.