Reserve Bank of India (RBI) Governor Shaktikanta Das said on Wednesday that the economic recovery would be slow, but the central bank stood “fully prepared and is battle-ready” for whatever measures were needed to prop up growth.
Das said while there had been some recovery, it was “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 the economy are confronted with rising infections,” he said in an address streamed online. The event was organised by the Federation of Indian Chambers of Commerce & Industry (FICCI).
He said the immediate policy response to Covid-19 had been to prioritise the stabilisation of the economy and support a quick recovery, but policies for the medium term after the crisis would be equally important. He suggested five focus areas, including prioritising human capital, increasing productivity, and trying to get into the global supply chain.
While responding to requests from industry captains on whether norms regarding the resolution of stressed accounts could be liberalised further to include more companies, the governor was forthcoming. He said for the central bank, protecting depositors' interest and preserving financial stability would be a prime concern. “The primary concern in the banking system is the protection of depositors’ money. Ultimately, it is the depositors’ money that is being lent out,” Das said.
“Depositors run into crores in numbers, whereas borrowers are in lakhs. There are small depositors, middle-class depositors, there are retired people who depend on bank deposits. So, the interests of depositors have to be protected. Also, the aspect of financial stability of the banking sector needs to be also kept in mind,” he said, responding to various demands by industrialists.
The governor said banks had an important role in spurring economic development in an emerging-market economy like India as they were in the forefront of providing credit.
“We don’t want a repeat of the situation which India experienced four-five years ago where the non-performing assets (NPA) levels of banks had gone up very steeply. On the other hand, we are also mindful of the fact that Covid-19 has adversely affected a large number of businesses, particularly those that took loans from banks. They also needed some relief,” Das said.
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Businesses that are otherwise viable but have genuine cash-flow problems because of temporary disruptions in activity have to be looked after too. “So, the focus is to assess and enable such businesses that are otherwise viable but their cash flows are drying up. Both the sides have to be matched and, in fact, the revival of such businesses will also ensure NPA levels are kept low and swift economic recovery takes place,” he said during the question-answer round of his keynote address. In this context, he praised the Kamath committee for coming up with an exhaustive set of recommendations in just 30 days.
Das also said the RBI could not give the same leeway to the non-banking financial sector as it gave to banks because NBFCs had enjoyed a light-touch regulation until now.
The loan-to-value ratio in the case of gold loans for NBFCs is 75 per cent, whereas for banks it could go up to 90 per cent.
Besides, gold loan companies will have to take permissions for branch opening, whereas banks do not have such restrictions.
This is because gold loan business is just a tiny portion of banks’ business, whereas gold loan companies are wholly dependent on that. If there is a fluctuation in gold prices, NBFCs can get wiped out, a scenario that the central bank does not want to witness.
“Fragility and vulnerability of NBFC sector is still a concern. We don’t want a repeat of another crisis of a large NBFC. It is our endeavor that no large NBFC should fail. We have been very rigorously monitoring the top 100 NBFCs because we cannot afford to have another crisis in the NBFC sector,” the governor said.
He said the government's borrowing programme, despite its large size of Rs 12 trillion, was being done at a decade-low level of rates. The borrowing is being done at around 6 per cent, thanks to the liquidity measures undertaken by the central bank. Private corporations have also benefited and spreads have narrowed for all firms, Das pointed out.
Domestic policies, he said, needed to focus on a right mix of local and global rules. “Provision related to investment, competition, intellectual property rights protection has a larger positive impact on global value chain trades and need to be assiduously cultivated and intergraded in the Indian ecosystem," the governor said. “Covid-19 has changed our lives and it is increasingly getting clear that life will never be the same again,” but “we should look upon these fundamental changes as opportunities rather than threat,” he said.