Mumbai, September 4, 2013
New RBI Governor speaks on economy
New Reserve Bank of India (RBI) Governor Raghuram Rajan today asserted that, despite many challenges, India is a fundamentally sound economy with a bright future and promised that, together with the government and regulators such as SEBI, the central bank would surely liberalize the 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," he told mediapersons after taking over as the 23rd Governor of the RBI here this afternoon, but announced a few measures as a "symbolic down payment".
"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, the RBI has decided to enhance the limit available to exporters to 50 per cent; and allow a similar facility to importers to the extent of 25 per cent," he said.
Further to develop the money and G-sec markets, the RBI will introduce cash settled 10 year interest rate future contracts.
It will also examine the introduction of interest rate futures on overnight interest rates, he said.
Stressing the need to think beyond the next few months and internationalize the rupee, Dr Rajan said that, as the country's trade expands, the RBI would 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 liberalization," he said.
He said the RBI wanted to help Indian banks bring in safe money to fund the country's current account deficit.
"Reserve Bank of India has been receiving requests from banks to consider a special concessional window for swapping FCNR deposits that will be mobilized 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, mobilized 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," he said.
"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 mobilized 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," he said.
The above schemes will be open up to November 30, 2013, which coincides with when the relaxations on NRI deposits expire. RBI reserves the right to close the scheme earlier with due notice, he said.
Dr Rajan said the RBI had been working hard to improve the financial infrastructure of the country, especially in strengthening the payment and settlement systems. 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 emphasize the use of the unique ID, Aadhaar, in building individual credit histories. This will be the foundation of a revolution in retail credit," he said.
For small and medium firms, he said the RBI intended 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 the Committee on Financial Sector Reforms headed by him in 2008, and he intends to see it carried out, he said.
Dr Rajan also stressed the need 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 recapitalize 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," he said.
He said that he had asked RBI Deputy Governor K C Chakrabarty to take a close look at rising non-performing assets (NPAs_ and the restructuring/recovery process.
"We too will be taking next steps shortly. 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," he said.
"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 program 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," he said.
Dr Rajan also promised steps to provide households with a safe investment vehicle, the ability to transfer remittances to loved ones, insurance, direct benefits from the government without costly intervening intermediaries, and 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," he said.
In this context, he announced some specific actions, including the issuance of Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by end-November to protect households against CPI inflation.
He said the RBI would 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," he said.
At pesent, only banks are allowed to deploy Point-of-Sale (POS) 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," he said.
Dr Rajan also said there was substantial potential for mobile based payments. He said the RBI would 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," he said.
Dr Rajan began by stating that, while it faced challenges, 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," he said.
He also promised transparency and predictability in the working of the RBI. "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," he said.
He said the RBI would be making the first monetary policy statement of his term on September 20.
"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 FSLRC, have opined on this, and their views will also be considered carefully," he said.
Dr Rajan said the central bank had two other important mandates: inclusive growth and development, as well as financial stability. He stressed the need for faster, broad-based, inclusive growth leading to a rapid fall in poverty.
He also underscored the importance of more competition between banks and more freedom for them in decision-making.
He said the RBI would 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," he said.
He said the RBI would 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 reputations. This committee will screen license 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 licenses within, or soon after, the term of DG Anand Sinha, who has been shepherding the process. His term expires in January 2014," he said.
"We will not stop with these licenses. The RBI has put an excellent document on its website exploring the possibility of differentiated licenses 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," he said.
"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 on a reciprocal basis. We are in the process of sorting out a few remaining issues so this move can be made," he said.
Dr Rajan said there was 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," he said.
He said that for the 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," he added.
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