Category: Speeches

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

I am happy to be back at the State Bank of India Banking & Economics Conclave. I thank the Chairman, SBI and the organisers of this event for having invited me to address this august gathering. The theme of this year’s conclave ‘Contours of Economic Recovery in Post-Covid World’ is both well-timed and relevant. Well-timed because, after all the trials and tribulations, we might just be knocking at the door of the post-COVID world. Relevant because a crisis of this magnitude will not only reshape the economy but also the contours of economic recovery. In our lifetimes and even in future generations, we would hopefully not reckon with a bigger crisis than COVID-19. So, in the spirit of never letting a crisis go to waste, we have to learn from the pandemic experience to build a stronger and resilient economy. In my remarks today, I propose to touch upon the theme of the conclave.

2. Vast swathes of the global economy were held hostage by COVID-19 over the last two years. To save humanity as well as the economies from the clutches of the virus, speedier and equitable access to vaccines remained the only hope. India’s remarkable progress on this front is a shining example of our scientific capabilities and tech-enabled public delivery. With a scale of vaccine production, which is among the highest in the world, India is poised to lead the fight against COVID-19. It is a moment to pay our tribute to everyone who has made this possible. Improved vaccination and reduced infections have materially reduced extreme health outcomes like hospitalisation and mortality. This has boosted consumer confidence. With additional boost coming from the festival fervour and pent-up demand, numerous high-frequency indicators suggest that economic recovery is taking hold.

A Quest for Sustained Growth

3. While it is heartening to note that the economy is gradually getting back on its feet after a devastating second wave, recovery has progressed in an uneven manner. Contact-intensive services are still to regain the lost capacity despite rapid improvement in the recent period. The Q1:2021-22 data on GDP revealed that there still exists significant gap in both private consumption and investment, relative to their pre-pandemic levels in 2019-20. So, while the economy is picking up pace, it is yet to cover a lot of ground before it gets broad-based and entrenched. This points to the need for sustained impetus so that growth could return to, or better still, exceed the pre-pandemic trend.

4. I firmly believe that India has the potential to grow at a reasonably high pace in the post-pandemic scenario. Several factors are stacked in India’s favour. First, India as an emerging market and developing economy has significant potential to catch up with the rest of the world supported by favourable demographics, improving skill base and strong domestic demand. Second, the Government is providing necessary support – especially through capital expenditure and reforms in various sectors like infrastructure, manufacturing and telecom, apart from other institutional changes to boost productivity, ease supply constraints and improve business environment. Third, the pandemic has opened new opportunities of growth in digital and green technology and also on account of resetting of global supply chains that could be advantageous to India. Fourth, exports have been a bright spot during the recent months and are likely to benefit further from global economic recovery. In the presence of such enabling conditions and supportive policies, I have no doubt that we have a unique opportunity to step up growth as we emerge from the pandemic. Let me dwell further on some of these issues.

Private Consumption – Backbone of Growth

5. Contributing the largest share of aggregate demand (around 56 per cent of GDP), private consumption is critical for inclusive, durable and balanced growth of our country. Daily wage earners and workers at the lower rungs of the society have incurred significant losses of income and employment during the pandemic that will take time to repair. The International Monetary Fund (IMF) estimates that less than 70 per cent of emerging economies will be able to achieve 2019 employment levels even by end of 2022. In India, demand for work under MGNREGA¹ remains about 10 million higher than pre-COVID levels, suggesting that the recovery in informal sector has still to cover a distance. A minimum tenure of contract for semi-skilled labour, especially in infrastructure sector and linked to duration of projects may perhaps induce employment certainty and consumption. Small businesses have also been hit harder and would require support to recover and achieve their full employment potential.

6. There are signs that consumption demand triggered by the festive season is making a strong comeback. This would encourage firms to expand capacity and boost employment and investment amidst congenial financial conditions. The recent cut in excise duty on petrol and diesel by the Central Government and in value-added tax (VAT) by several State Governments will augment purchasing power of people, which in turn, will create space for additional consumption. Are we at the cusp of a virtuous feedback loop where increased demand impulses will move in lockstep with commensurate supply response and ensure sustained growth of the economy? There are reasons to be optimistic on this front.

Reviving Investment

7. Reinvigorating private investment is crucial to realise India’s growth potential. Various policy measures have been taken to support investment. These include cut in corporate taxes, taxation reforms, introduction of Performance Linked Incentive Scheme for 13 major sectors, enhanced focus on infrastructure development and asset monetization by the government, initiatives by the government under the Atma Nirbhar programme and proactive liquidity measures by the RBI. Encouragingly, some improvement in investment activity has been observed in the recent period. Leading indicators of investment like production and Import of capital goods are higher than pre-pandemic level in September 2021. Early results of firms in Q2:2021-22 suggest robust sales and resilient profitability despite input cost pressures. Such trends could provide impetus to capacity expansion by the corporate sector in the coming quarters.

8. The pandemic has catalysed far reaching changes in the systems of production, management and governance. The crisis underscored that technology could bridge the resource gap to a large extent and is a key enabler of inclusive growth. Emerging technologies such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, energy storage and developments in material science have touched all aspects of our daily lives. The future belongs to data-driven smart manufacturing and businesses need to gear up to make the right investments sooner than later. Investment in knowledge and skill upgradation holds the key to transforming the manufacturing sector. Close coordination between industry and the education system is required to revolutionise the industrial sector. Overall, the right mix of investment in physical and human capital can usher in an era of sustained growth.

9. The investment outlook is bolstered by the entry of next generation firms, or the Start-ups. India has emerged as one of the top performers in the Start-up landscape, which is a reflection of the immense potential for innovation and dynamic entrepreneurship. A large proportion of the investment flowing into tech Start-ups has been in response to the post-pandemic spurt in demand for internet-based services across various sectors such as food delivery, education and health. Policy emphasis on Start-up development through exemption of angel tax and improved governance measures have also supported this sector.

10. International experience suggests that GDP growth can significantly improve if scarce resources are reallocated to the dynamic sectors of the economy. While agriculture and construction together account for nearly 56 per cent of the total employment in India, their contribution to GDP is about 25 per cent. Thus, a large segment of the workforce is stuck in lower productivity areas constraining our growth potential.

11. Further, with stronger balance sheets, the organised corporate sector is well-placed to make new investments in emerging areas. As demand recovers, I am sanguine about corporate sector playing a major role in turning the investment cycle that will facilitate absorption of surplus liquidity for productive investment.

12. In this background, it is incumbent upon a competitive and efficient financial system to identify high productive sectors and reallocate resources to harness the growth opportunities. Banks, in particular, should be investment ready when the investment cycle picks up.

Critical Role of Public Expenditure

13. The COVID-19 pandemic has reinforced the need to spend on physical and social infrastructure including education, health, innovation and digitisation which are not only welfare-enhancing, but also growth-inducing. Further, good quality public expenditure helps crowding-in private investment and alleviating critical supply constraints. This can also ease inflationary pressures.

14. How can we make public spending more effective in addressing growth and welfare concerns? First, to build a strong and resilient economy, growth-boosting elements of public spending must be preserved and cultivated. The current drive towards an investment-led recovery with policy thrust on capital expenditure can get a further boost if we develop certain measurable parameters for the quality of public expenditure. The formal weaving of quality targets into fiscal consolidation paths of the central and state governments will make the fiscal policy more efficient, effective and humane. Such an approach can infuse pro-cyclicality bias by assuring a steady provision of quality public goods. Second, significant variation is observed in spending behaviour across states, with some fiscally prudent states despite their low debt-GSDP ratios, hesitating to spend up to their full potential despite infrastructure gaps. Fiscally strong states could indeed lead the expenditure drive in critical areas of public infrastructure. This would boost not only their own potential growth prospects, but can also kick-start an all-India investment cycle with positive spill over to other states. Third, periodic reviews followed by phasing out or rationalisation of existing schemes based on their actual outcomes can lead to more efficient allocation of limited resources. Every new scheme launched should have a sunset date linked to outcomes.

Boosting Exports

15. India is set to achieve the milestone of US$400 billion annual exports driven by robust external demand for Indian products like engineering goods, petroleum products, drugs and pharmaceuticals, chemicals and agriculture products. Out of the top ten export partner countries, India’s share has increased in eight countries during during April-August 2021 over the same period last year. Notwithstanding this, there remains significant export opportunities in several emerging areas. First, India has a natural advantage in the agriculture sector. Apart from traditional export items like cereals, sugar and cotton, agricultural exports can be diversified into new areas to take advantage of shifting consumer preferences and environmental concerns. Second, climate change concerns have pivoted the automobile sector towards electric vehicles (EV). EV sales are increasing at a brisk pace. This has ramped up the demand for metals like lithium and cobalt which are used in batteries, far in excess of their reserves. Therefore, it is of strategic importance to build a robust ecosystem for recycling and producing EV batteries with newer materials through various incentives not only to ensure adequate domestic supply but also to take advantage of the huge export potential in this area. Third, significant export opportunities exist in space and defence sectors for launch vehicles, cost-effective launch of satellites, aerospace and defence goods and services where public-private partnership can yield rich dividends.

The Role of the Financial Sector

16. The edifice of growth and development in modern societies is built on the foundation of a vibrant, resilient and well-functioning financial sector. I would now reflect on the strengths and challenges in our financial sector as we emerge from the pandemic.

Building Buffers for the Future

17. Banks have weathered the COVID-19 shock better than expected. As per the early trends, the GNPA and Capital Adequacy ratios of SCBs have further improved in September 2021 from their levels in June 2021. Banks have also been prudent in raising capital. Profitability metrics of several banks are also at highest levels in several years. The improved parameters partly reflect regulatory relief provided to banks during COVID-19 as well as fiscal guarantees and financial support given by the Government. Going forward, there are risks and challenges which require serious introspection and action on the part of the banking system.

18. First, the COVID-19 episode provides a real-life experience to take a fresh look at certain aspects of existing prudential and regulatory norms for financial entities regulated by RBI. Certain concerns have re-emerged from the crisis which warrant our attention. Most importantly, we are faced with the question of capital and provisioning buffers of banks, their adequacy and resultant usability during a crisis. I would thus strongly urge the banks to focus and further improve their capital management processes with a forward-looking, scientific and prudent approach. The key point is to envisage the capacity for loss absorption as an ongoing responsibility of the lending institutions. It is expected that banks will exhibit prudent risk-taking behaviour and use their capital efficiently.

19. Second, good governance is a necessary condition for having well-functioning, strong and resilient financial institutions. Banks have the privilege of raising deposits from the public, which also puts the onus on them to conduct their business in a very responsible manner. The Board of Directors carry the responsibility of being guardians of the trust that depositors have reposed in a bank. A bank’s responsibility towards depositors should, therefore, be weighed against its responsibility towards shareholders of the bank. To ensure good governance, the Reserve Bank has high expectations from the oversight role of the Board, its composition, Directors’ skill profile, strong risk and compliance structure and processes, more transparency and a robust mechanism of balancing various stakeholder interests. Thus, business priorities need to be complemented with responsible governance and ethical actions.

20. Third, banks should ensure that their business models and business strategies are conscious choices, following a robust strategic discussion in the Board, instead of being driven by mechanical ‘follow the market’ approach. In their endeavour to grow, banks should avoid herd mentality and look for differentiated business strategies. At the RBI, we have started taking a closer look on the business models and strategies of banks. Certain banks had followed the high risk and high return business strategy, with a skewed priority for serving only the interest of their investors. The active role of the Board, especially in challenging the proposals of the management, thus becomes critical. This will contribute towards a more diligent and balanced approach to decision making.

21. Fourth, another major challenge would be in dealing with the stressed borrowers impacted by COVID-19. During the two waves of COVID-19, the Reserve Bank announced Resolution Framework 1.0 and 2.0 to provide relief to the borrowers and banks. While the resolution in respect of large borrower accounts restructured under Resolution Framework 1.0 was to be implemented by June 30, 2021, they have time till September 30, 2022 to achieve the operational parameters. On the other hand, resolutions invoked under Resolution Framework 2.0 before September 30, 2021 in respect of individuals, MSMEs and other small businesses, have to be implemented by December 31, 2021. As the support measures start unwinding, some of these restructured accounts might face solvency issues over the coming quarters. Prudence would warrant proactive recognition of such non-viable firms for pragmatic resolution measures.

22. Fifth, it may not be an overstatement to say that financial services industry today is in the midst of a ‘technological invasion’. The ongoing digitalisation of finance has led to positive disruptions on many fronts. Needless to say, the Reserve Bank has been actively fostering innovation in this cross-fertilised space by envisaging mechanisms like regulatory sandbox for fintechs, co-lending models, account aggregators, etc. We would expect lending institutions to leverage upon these mechanisms to enhance the overall customer experience, product customisation, adoption of alternative credit appraisal methodologies, monitoring measures, among others. A word of caution is in order: globally, the ‘phygital’ revolution has played out into several collaborative models between banks, NBFCs and fintech players such as incubation, capital investment, co-creation, distribution and integration. While lenders are free to explore any of these models, the regulatory expectation is that the eventual tie-up decision should be as per their own commercial wisdom in terms of their internal policies subject to extant regulatory guardrails. They should also ensure that compliance requirements in terms of regulations such as the Banking Regulation Act, the Information Technology Act, outsourcing guidelines, fair practice codes, etc. are met for data security, data privacy and redress of grievances. Further, sufficient safeguards in contracts with fintech and bigtech entities should also be ensured. Therefore, as we take this journey of innovation forward, it must be recognised that the risks ultimately lie in the books of banks and NBFCs and hence the collaboration should be appropriately strategised.

23. Sixth, lenders should never lose sight of their raison d’etre – the customer. As you are aware, under the Integrated Ombudsman Scheme, and even under the earlier Ombudsman Schemes, only the complaints pending beyond 30 days with the Regulated Entities (including banks) are dealt with by the RBI Ombudsman. Thirty days is a very reasonable period for resolution of customer complaints. I would urge the banks to pay particular attention and take measures, as necessary, to revamp/strengthen their grievance redress mechanisms and minimise the escalation of grievances to the RBI ombudsman in the interest of the customers. Banks should also ensure fair treatment of customers and avoid mis-selling through proper sensitisation of staff and direct selling agents. The product sold to the customer should be suitable and appropriate for his/her risk profile.

Conclusion

24. As we tread ahead on the growth path after the pandemic, India’s rightful place in the global economy will be built on a sound, stable and resilient financial system. Banks and NBFCs, being the power engines of our economy, must undergo continual metamorphosis to accelerate this transformational journey. I wish to see the senior bankers here as the ‘change agents’ in their respective institutions to catalyse this whole transformation.

My best wishes for productive and meaningful deliberations ahead!

Thank you. Stay well. Namaskar!

---

¹The Mahatma Gandhi National Rural Employment Guarantee Act, 2005.

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

BRICS: FROM ACRONYM TO GLOBAL ECONOMIC POWERHOUSE¹

Professor Pami Dua, Director, Delhi School of Economics, Prof. Yogesh Singh, Vice Chancellor, University of Delhi, Prof. Sanghamitra Bandyopadhyay, Director, Indian Statistical Institute, Delhi Centre, Prof. Chetan Ghate, Indian Statistical Institute, distinguished invitees and conference participants, I am honoured to be invited to deliver the inaugural keynote address for the conference on ‘Growth and Development in the BRICS Economies’ jointly organised by the Delhi School of Economics and the Indian Statistical Institute, Delhi Centre. The conference is timely and topical in view of India taking over the presidency of BRICS in 2021. The discussions in the conference and the signed papers to be presented will surely shine light on how the BRICS economies chart their course through the pandemic and into a post-pandemic future. My address is loosely divided into two parts, although I might be moving back and forth to tease out the inter-linkages. The first part will deal with the state of the BRICS economies and the immediate challenges that they face. This will be followed by an overview of the challenges confronting India, in view of the current BRICS presidency.

BRICS IN THE GLOBAL ECONOMY

The acronym BRIC is traced back to 2001 and widely attributed to Jim O’Neill, then Chairman of Goldman Sachs Asset Management, but apparently there is some dispute about its origin. Be that as it may, the first formal meeting of BRIC, i.e. Brazil, Russia, India and China, represented by their Leaders took place in Yekaterinburg, Russia in 2009. South Africa joined in 2010 and completed the BRICS. Together the BRICS account for more than 40 per cent of the world’s population, a quarter of global GDP, a quarter of global direct foreign investment and close to a fifth of world trade. It is in this context that the BRICS are being regarded as an emerging global powerhouse.

The BRICS encompass a wide diversity as well as distinct similarities. They include the most populous nations as well as relatively sparsely lived ones, with different demographic profiles, especially in terms of population ageing, life expectancy and share of dependents. They also vary quite widely in terms of their financial development, with the proportion of adults owning bank accounts being taken as a measure of financial inclusion. The BRICS also share many common features – broadly similar stages of development; accelerating growth in a sustainable manner as a development strategy; emphasis on inclusivity and digitisation; and investing into climate resilience. It is with these characteristics that BRICS have come together to contribute to the development and prosperity of human societies all over the world and thereby to the global common good.

The International Monetary Fund (IMF) projects global GDP to turn around from an unprecedented decline of 3.1 per cent in 2020 and expand by 5.9 per cent in 2021. The BRICS are expected to be the most important engine of global recovery, contributing 42 per cent of global growth in 2021, which is more than the combined share of the next three growth drivers (the US; the Euro area; the UK). The BRICS are also a formidable force in world trade, accounting for about 16 per cent of world merchandise and services trade by value. They comprise both commodity exporters and importers, with country specialisations across a range of manufactures and services. Intra-BRICS trade is expanding robustly and has exhibited a degree of pandemic proofing – illustratively, India’s trade with BRICS partners has risen to USD 113.3 billion in the pandemic financial year 2020-21 (April-March), up from USD 110 billion in the pre-pandemic year of 2019-20. In 2021-22 so far, all the BRICS nations are posting robust export performances.

The BRICS nations are financially open economies and preferred habitats for capital flows. In recent years, they have also experienced sudden stops and reversals accentuated by portfolio flows. By contrast, all of them are also recipients of relatively stable foreign direct investment. In 2020, there was a retrenchment of capital flows across emerging market economies (EMEs). Among the BRICS, only India and South Africa were spared from net outflows. In 2021 so far, net capital flows continued to favour India and Brazil. In contrast to the situation at the time of the 2013 taper tantrum, the BRICS appear to be well fortified on the external front. Currently, the BRICS collectively hold 33 per cent of global foreign exchange reserves, with China, India and Russia among the top ten reserve holders of the world. Reserve adequacy measured by prospective import cover ranges between 7 and 19 months. China and Russia typically run current account surpluses, and hence the focus of financial markets is usually on BRICS current account deficit economies – Brazil, India and South Africa. India moved into modest current account surpluses in 2020 and 2021 so far, but this may not last in view of rising import demand.

BRICS IN A MULTILATERAL ROLE

The BRICS have been staunch champions of multilateralism, voting unanimously for quota and governance reforms at the IMF to make it more representative of global economic realities, especially the rising profile of EMEs. Together, they hold 14.8 per cent of the IMF’s quota resources that total SDR 476.4 billion and 14 per cent of voting power. In the World Bank, they have increased their share in the institution’s capital to 14.1 per cent, with a share of 13.4 per cent in voting power. Confronted with an impasse in future quota reform amidst a hostile and volatile international environment, the BRICS have turned creditors to the IMF to supplement its quota resources. The collective share of BRICS in the IMF’s new arrangements to borrow (NAB) is 16 per cent of a total of SDR 361 billion. Besides, each BRICS nation has signed bilateral borrowing arrangements (BBA) with the IMF cumulating to a share of 17 per cent of a total of SDR 135 billion. In addition, the BRICS have put in place swap lines under a contingent reserve arrangement or CRA amounting to USD 100 billion, which matches their combined share in IMF quotas and is counted as a part of the global financial safety net (GFSN).

The BRICS were impacted severely by the pandemic, with multiple waves of infections which continue to take their toll. In terms of total infections, three BRICS, viz. India, Brazil and Russia are among the top five affected nations in the world. In terms of seven days rolling averages, new infections have eased in all BRICS countries barring Russia, contained by the scale and speed of vaccination drives. In terms of vaccinations, however, there are wide divergences ranging between three quarters of the population being fully vaccinated in China and only a fifth in South Africa. Full vaccination is an immediate challenge for all the BRICS. Among the leading exporters of vaccines, China, Russia and India figure prominently. In the case of India, vaccine exports were temporarily halted when domestic infections surged. As infections came down, India has resumed exports of vaccines from October, including under the QUAD initiative. Under the QUAD initiative of producing at least 1 billion doses of vaccines for the Indo-Pacific region by the end of 2022, the vaccines will be produced in India with the US financing capacity expansion, Japan providing concessional loans to India and Australia giving last mile delivery support. In a strong expression of commitment to the QUAD initiative, India financed 50 per cent of the first consignment of 1 million doses in October.

MACROECONOMIC DEVELOPMENTS AND POLICY RESPONSES

As a consequence of the differentials in infections and vaccination as well as differences in monetary and fiscal policy support, the BRICS are faced with divergences in macroeconomic conditions. While China’s recovery has been quick and strong, the other BRICS are moving into positive growth territory since Q2:2021. Wider differences characterise inflation outcomes. While Brazil and Russia – both commodity exporters – are experiencing inflation rates much above target and tolerance levels, China has kept retail inflation low despite high producer price inflation. In South Africa, inflation is within the target range. In India, inflation breached the upper tolerance band in May, but strong supply side measures in the form of augmented access to imports and buffer stocks as well as measures to incentivise productivity have yielded results, bringing down inflation close to target in September and October 2021.

There is considerable similarity among the BRICS in terms of their monetary policy frameworks. Four of them have adopted inflation targeting. The numerical targets range around four per cent and all of them have tolerance bands barring Russia which aims to keep inflation close to four per cent. South Africa does not have a point target – it follows an inflation target range of 3 to 6 per cent. China has not adopted inflation targeting but keeps inflation low and stable below 3 per cent. All of them responded to the pandemic with large rate cuts and reserve requirement reductions. More recently, Brazil and Russia have completed the normalisation of policy accommodation and Brazil is into orthodox tightening. India, China and South Africa continue to maintain accommodative monetary policy stances.

Another common feature among BRICS has been their pandemic response in the form of large fiscal stimuli and additional spending and/or tax revenue forgone. As a consequence, fiscal positions in terms of the gross fiscal deficit/GDP ratio worsened through the pandemic. Russia was running a fiscal surplus ahead of the pandemic and hence there was fiscal headroom which could be used during the pandemic with the least stress on the fiscal accounts. Accordingly, fiscal risks have risen sharply with debt-GDP ratios in the range of 66 (China) – 99 (Brazil) per cent of GDP. As I mentioned earlier, Russia is an outlier, with its debt-GDP ratio below 20 per cent of GDP.

Medium term challenges for the BRICS arise in the context of climate risks and emission commitments which may engender energy shortages, technology gaps and hence pose risks to medium term growth and inflation, especially for countries with large total emissions. A more immediate challenge stems from elevated commodity prices for net importers like India although they confer terms of trade gains for net exporters like Brazil and Russia. For all the BRICS, rising food prices on account of natural calamities and demand-supply imbalances caused by the pandemic involve elevated inflation risks.

Within the BRICS, per capita income levels differ widely. Studies conducted in CAFRAL, the Reserve Bank of India’s center of excellence, show that per capita income is a significant determinant of credit ratings across all three external rating agencies (S&P; Moody’s; Fitch). All the BRICS are vulnerable to the middle-income trap, which refers to a situation in which they could fail to transition to a high-income economy due to rising costs and declining competitiveness. Investment and innovation are the two key ingredients for moving a middle-income economy into a high-income economy, and it is necessary to understand the macroeconomic factors that influence each of them in our economies.

MILESTONES AND DELIVERABLES

Since the BRICS came into existence in 2009-10, significant milestones have been passed in their journey together.

• The New Development Bank (NDB) started functioning in 2015 and has approved about 80 projects in its member countries involving a portfolio of USD 30 billion in areas such as transport, water and sanitation, clean energy, digital infrastructure, social infrastructure and urban developments. Since September 2021, the NDB is approving new members (Uruguay; the UAE; Bangladesh). The NDB has set a target of USD 10 billion for COVID-related support of which more than USD 7 billion has already been disbursed.

• The Contingent Reserve Arrangement or CRA is a mechanism with a total corpus of USD 100 billion to provide short-term swap support during balance of payment crises. The swaps have a delinked portion of 30 per cent which can be extended as emergency liquidity support and a linked portion of 70 per cent, which is contingent upon the requesting country(s) having an IMF programme in place.

• The BRICS Strategic Economic Partnership 2021-2025 provides a roadmap for economic co-operation among the member countries, with a focus on trade and investment, the digital economy and sustainable development.

• BRISC or BRICS Information Security Channel is a recent initiative started during Russia’s presidency in 2020, with a focus on information exchange on cyber security and cyber related incidents.

• The BRICS Taskforce on public private partnership (PPP) and Infrastructure is another initiative to establish a forum to discuss various aspects related to co-operation in infrastructure. In 2021, the focus is on social infrastructure (health, education).

• BRICS Payments Task Force (BPTF) is a central bank initiative to promote co-operation in payments system, including proposal on cross-border payments.

• BRICS Business Council has been created as a platform to promote and strengthen business, trade and investment ties amongst the business communities of the BRICS and ensure that there is regular dialogue between them and the governments of the BRICS countries.

• The BRICS Women’s Business Alliance (WBA) aims at promoting women’s entrepreneurship in the BRICS countries.

• The BRICS Academic Forum (BAF) is a platform for deliberations and discussions among the leading academic institutions of BRICS countries, seeking ideas and solutions on numerous social, environmental and educational issues.

• The BRICS Think Tanks Council (BTTC) was initiated in 2013 to enhance cooperation in research and capacity building, among academic communities of BRICS countries.

• BRICS Energy Research Cooperation Platform promotes energy-based sustainable development, sharing of advanced energy technologies, expansion of cooperation on educational programmes, exchange of statistical data and plans on the development of national energy systems, and information on best practices and regulatory frameworks in the energy sector. The platform also aims at creating synergies in BRICS energy co-operation across various platforms.

• The BRICS Environmentally Sound Technology (BEST) Platform, launched in 2015, aims to facilitate accumulation and exchange of experience/information on best available practices and environmentally friendly (“green”) technologies to achieve the United Nation’s Sustainable Development Goals (SDGs).

• The Report on Digital Financial Inclusion puts together initiatives, innovations and reforms undertaken in the BRICS countries in the area of financial inclusion by leveraging digital technology tools. The Report also maps these efforts against the G-20 High-Level Policy Guidelines on digital financial inclusion.

Under India’s presidency, six projects have already been taken forward to completion:

• The e-booklet on Information Security Regulations and the Compendium of BRICS Best Practices on Information Security Risks cover information security regulations and best practices across BRICS jurisdictions, with the objective of strengthening cyber incidents management systems.

• The CRA Evaluation Report covers all the issues and recommendations arising from this year’s CRA test run as well as past test runs conducted since 2018.

• The first BRICS Collaborative Study ‘COVID-19: Headwinds and Tailwinds for Balance of Payments of BRICS’ highlights the severe economic disruptions caused by the pandemic globally and in the BRICS economies, resulting in sharp current account adjustments as well as volatility in capital flows.

• The BRICS Economic Bulletin for 2021 is on the theme ‘Navigating the Ongoing Pandemic: The BRICS Experience of Resilience and Recovery’. It covers divergent economic recoveries, inflation risks, fiscal stress, external sector performance, and financial sector vulnerabilities.

• In 2021, the test run of the IMF-linked portion of the CRA was conducted for the first time. Modalities of co-operation with the IMF are being finalized.

• Among the deliverables over the rest of the year, the BRICS Bond Fund (BBF), which is a joint initiative of BRICS central banks with a view to developing local bond markets in member countries, is now close to completion.

• BRICS Finance Ministers and Central Bank Governors (FMCBG) adopted a ‘BRICS Statement on Global Economic Outlook and Responding to COVID-19 Crisis’ in August 2021. The Finance Ministers and Central Bank Governors agreed to continue efforts to strengthen BRICS cooperation towards achieving strong, sustainable, balanced and inclusive economic growth in a post-pandemic world and welcomed the sharing of policy experiences by BRICS countries on their domestic economic responses to the pandemic.

• The MSME Roundtable 2021 has helped enhance BRICS cooperation with a view to development of MSMEs integrating them into global value chains.

• In 2021, BRICS Agreement on Cooperation and Mutual Administrative Assistance in Customs Matters was finalised.

CHALLENGES CONFRONTING THE CHAIR

Let me now turn to the challenges facing India in its year of the BRICS presidency.

GDP growth is widely used as an indicator of economic progress of a country. If one looks back over the last 75 years, Bai-Perron structural break point tests reveal that India’s growth trajectory has gone through three phases. Up to the end of the 1970s, India averaged trend GDP growth of 3.5 per cent – the so called Hindu rate of growth – which has been associated with inward-looking policies adopted over that period. Trend growth picked up to 5.5 per cent during 1980–2002 as liberalisation and opening up occurred. Thereafter, GDP growth rose to an average of close to 7 per cent over the period 2003-20 till the pandemic arrived. In 2020-21, GDP declined by 7.3 per cent, among the deepest contractions worldwide in that year.

What are the growth drivers in India? It turns out that India’s growth is led by households – private consumption expenditure – though its share in GDP has come down from above 75 per cent in 1960s to about 55 per cent in recent years. There have been phases of export-led and investment-led growth, which could not be sustained, but they did provide turning points in the growth path.

The KLEMS² database, so assiduously built up by the Delhi School of Economics for the Reserve Bank of India, reveals that capital accumulation is the largest contributor – about 60 per cent – to India’s growth. Therefore, the investment rate (total investment/GDP) is regarded as the most important lever of growth in India. A striking feature is that our growth is home grown – investment is financed primarily by domestic savings, with capital inflows from abroad playing only a supplemental role. Another noteworthy feature is that the saving rate has started slowing down after the global financial crisis (GFC). Eventually, this pulled down the investment rate from 2012-13. Reversing this trend is critical to achieve higher growth.

The current account deficit (CAD) in the BoP (X-M) determines how much of net capital inflows into the country can be absorbed or used for growth. Our experience has been that India can sustain a current account deficit of 2.5-3.0 per cent without getting into an external sector crisis. In fact, in a telling reminder of this fact, a record increase in gold imports took the current account deficit above this Plimsoll line to historically high levels during 2011-13. India faced the taper tantrum and was labelled as among the fragile five³.

After an impressive average export growth of around 20 per cent in the 2000s which also coincided with a pick-up in openness of the economy to trade and finance and a rise in the trend growth of GDP, export growth dropped from 2015 onwards. Rising trade protectionism took its toll, and this period is also associated with GDP growth deceleration. The robust recovery in world trade in 2021 so far has brought with it a renewed sense of optimism about exports acting again as an engine of growth. India’s exports are progressing fast towards the annual target of US$400 billion set for 2021-22. In H1:2021-22, the actual export level was already half of the target. Measures such as production-liked incentive (PLI) scheme are expected to boost exports⁴. Financial openness is also improving, consistent with trade openness – India bucked the global trend and recorded highest-ever inward FDI to the tune of US$ 82.0 billion in 2020-21.

India has a bank-led financing system and, therefore, bank credit growth is a bellwether indicator of the financing challenges to growth. In recent years – since 2017 – there has been a slowdown in bank credit, especially to industry. This is largely attributable to the stress in banks’ balance sheet due to a large overhang of non-performing assets (NPAs), traced to the credit boom in mid-2000s. Global overcapacity and the slowing down of the economy led to a turning of the investment cycle, project delays and cost overruns. Bank defaults increased, and stressed banks became reluctant to take new lending risks. Furthermore, in the aftermath of the GFC, banks were allowed to restructure assets and treat them as ‘standard’ advances but with additional provisions. Withdrawal of regulatory forbearance on restructuring of advances from April 2015 and a subsequent asset quality review (AQR) led to more realistic recognition of gross NPAs (GNPAs). After reaching a peak of 11.5 per cent in March 2018 the GNPA ratio has been declining, mainly due to resolution of stressed assets under the insolvency and bankruptcy code (IBC) process and the Reserve Bank’s revised framework for resolution of stressed assets. Before the onset of COVID-19, the GNPA ratio banks in India stood at 8.3 per cent at end-March 2020. It fell further to 7.5 per cent by the end of March 2021, showing that banks used the pandemic period to improve recoveries and write off intractable loans while making higher provisions in their balance sheets. With banks in a risk averse mode, non-banking sources (both domestic and foreign) are contributing as much or even more in recent years to the flow of resources to India’s commercial sector.

The agglutination of supply disruptions, the health crisis, an unparalleled mass migration and a hostile global environment has caused a considerable loss of output – over a tenth of annual GDP of a normal year. With a growth of 9.5 per cent in 2021-22 (according to the Reserve Bank of India’s projections), India’s GDP would be a shade above its level in 2019-20. Recovering this lost output may take several years – this I will regard as the second most important challenge. Earlier in the context of the BRICs, I had pointed out that speedy vaccination of the entire population is the most important challenge.

The Quarterly Employment Survey (QES) of April 2021 of the Labour Bureau, covering 9 sectors and 85 per cent of organised sector employment, shows that between March 21, 2020 and July 1, 2020, i.e. the lock down period, all sectors suffered a decline in the number of employees. Only 34 per cent of units could function during March 25, 2020 to June 30, 2020, with the exception of the health and financial sectors. As regards wage loss, the impact on the organised sector was soft as 80.7 per cent of employees received full wages and only 2.7 per cent went without wages. Putting people back to work, reskilling them to respond to the changing environment and enhancing their productivity is the third challenge. Out of 132 countries, India is ranked at 100 in terms of labour productivity.

India’s population at 1.38 billion is the world’s youngest at 28.4 years, but aging will close the demographic dividend by 2045. By 2027, India will be the most populous country in the world (1.47 Billion), according to the United Nations World Population Prospects. This structure of the population can be best represented by the age dependency ratio – the ratio of the dependent population (0-14 years and 65+ years) to total working-age population: a lower value of the ratio implies a more productive population. India’s age dependency ratio has been declining and is likely to decline further till 2025 after which it may remain stagnant till 2040 and increase thereafter. A comparison of India’s working-age population as a ratio of the total population or WAP ratio shows that India stands at an advantageous position – India’s WAP ratio will increase till 2045 even as it is declining elsewhere in the world. Making the most of this demographic dividend is fourth major challenge facing the Indian economy.

India was one of the fragile five countries in 2013 as external sector viability deteriorated during the taper tantrum. Relative to macroeconomic configurations in 2013, India is better positioned currently as its macroeconomic fundamentals have improved significantly and external sector indicators point to the availability of enough cushions to manage external shocks. I present this strength as a challenge because the international environment is turning hostile, with geopolitical tensions, the long-lasting scars of COVID and the inevitability of climate change. Furthermore, countries all over the world are contemplating shifting their policy stances away from a pandemic mode to a more normal one. This will involve global spillovers to which India cannot be immune. Hence external sector viability is critical.

India is currently one of the fastest-growing major economies in the world. In purchasing power parity (PPP) terms, India is the third largest economy in the world. Projections show that by 2040 India will be the second largest economy in the world. This, in my view, is the final challenge – preparing, with the BRICS, to be a global economic powerhouse.

Thank you.

---

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

A very warm good morning and Namaskar.

1. On behalf of the Central Board of the Reserve Bank of India, I have the privilege of welcoming the Hon’ble Prime Minister to this event to launch two major initiatives of the Reserve Bank. Sir, your participation in this event is a source of great motivation for all of us in the RBI. I would also like to welcome the Hon’ble Finance Minister to this event and thank her for her continuing support. We are also honoured by the esteemed presence of Hon’ble Ministers from the Central and State Governments, other financial sector regulators, Senior Govt. Officials, MD & CEOs of Banks and various regulated entities of RBI and several other dignitaries. A warm welcome to all the viewers from across the country.

2. The Reserve Bank, with its multifarious role touches the lives of the people in varied ways, be it through the currency system, the banking system, the financial markets or the 24×7 seamless digital payments. The Reserve Bank has been leveraging technology and innovation for enhancing the efficiency of its services. The recent announcement of a global hackathon contest, “HARBINGER 2021 –Innovation for Transformation” with the theme ‘Smarter Digital Payments’ on November 9, 2021, is another such initiative by the Reserve Bank to promote innovation.

3. The RBI’s developmental role is focussed on further deepening of financial inclusion and undertaking people-centric initiatives. The two schemes being launched today by the Hon’ble Prime Minister are steps in this direction.

4. The first scheme, namely the Retail Direct Scheme seeks to widen the investor base for government securities by creating an ecosystem whereby retail investors can easily participate in the government securities market which is so far dominated by institutional investors. By doing so, India is setting an example in democratisation of the government securities market.

5. The other scheme being launched today by the Hon’ble Prime Minister i.e. the Integrated Ombudsman Scheme focuses on strengthening the grievance redress mechanism for consumers of various services provided by the RBI regulated entities like Banks, NBFCs and payment system operators. The existing ombudsman schemes are being integrated into a single scheme which will offer the benefit of a single platform to customers for getting speedy resolution of their grievances. This integrated scheme will reinforce confidence and trust in the financial system.

6. The launching of these two citizen centric initiatives today will provide further impetus to our journey towards a more inclusive and responsive financial system. I once again extend a warm welcome to all the dignitaries, participants and viewers.

Thank you.

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

A very good evening to all the distinguished dignitaries and participants at this annual BFSI Summit organised by the Business Standard. The Summit has over the past few days seen excellent discussions on several topical issues related to the Banking and Financial Sector and generated some very useful insights.

2. The topic for today’s discussion is ‘Bank Privatisation: Undoing 1969’, which is one of the most widely debated issues for long. The detailed deliberations on the topic are scheduled separately by a panel comprising of eminent personalities. The Reserve Bank’s regulatory and supervisory approach has largely been driven by ownership neutral approach with focus on ensuring financial stability and resilience of its financial entities. Banking practices evolved rapidly post liberalisation. The ever changing financial landscape of the country and advent of Information Technology posed newer challenges for the banks as well as its regulator and supervisor. Banks being the engine of growth for the Indian economy, quickly adopted to this new reality of competitive environment and resorted to various new practices to maintain their bottom line. The adoption of new business models without adequate risk management and weakness in internal controls at times resulted in weak underwriting standards. The adverse developments in a few regulated entities in the past exposed some fault lines, primarily in terms of inadequate governance, inappropriate business model and weak internal assurance functions. RBI, therefore, undertook a review of its approach towards supervision as well as the existing practices in Supervised Entities (SEs) to identify the root causes for these gaps. Accordingly, the supervisory approach was reworked out in recent period to bring more focus on addressing these weaknesses.

3. In my address today, I would therefore like to talk about the changes in our expectations from financial entities along with the changes we brought about in our supervisory approach . Keeping in mind the overall objective of supervision i.e “Ensuring the safety, soundness and resilience of financial entities, thereby protecting the depositor’s interest and maintaining financial stability”.

Governance

4. I would like to begin with the issue of governance. Corporate Governance is the corner stone for any enterprise, but for banks, it assumes a distinctly different undertone and importance. It is well-known that banks are special in terms of services they render and the segments they touch while rendering these functions. By providing financial intermediation and maturity transformation, payment and settlement services, reducing information asymmetries, and engaging in deposit mobilisation, banks act as catalysts in growth of the economy. Most importantly, they enjoy the privilege of mobilizing uncollateralized public deposits and operating with high levels of leverage. The negative externalities of banks and NBFCs are also much higher than those for any non-financial entity due to their inter-connectedness. That’s why, globally, banks are regulated and supervised very closely.

5. It is also well-acknowledged that shareholders are driven by maximisation of the returns on their capital. But in banks, this objective is realised largely through the resources raised from depositors. Hence, as repositories of public resources, banks need to design appropriate governance standards and implement internal controls to be worthy of the public trust. Being highly leveraged entities and with their inter-connectedness, there must be separation between ownership and management so that they operate on professional lines.

6. Governance reforms have been an area of continued focus for the Reserve Bank. The various regulatory measures including the mandatory listing of private sector banks, composition of the Board and its Committees, guidance on “fit and proper” criteria and on remuneration, separation of chairperson from managing director / chief executive officer have all been driven to improve the corporate governance and internal controls in banks.

Supervisory Initiatives

7. I shall now highlight the various prudential supervisory initiatives taken by Reserve Bank in recent years. The broad objectives of these can be detailed as follows:

(i) Bringing about a unified and more holistic approach to supervision and improving skill and capacity of supervisory staff.

(ii) Improving the governance practices and internal defenses in supervised entities, including an assessment of business model adopted.

(iii) Identifying early warning signals, increasing the focus on root cause of vulnerabilities and initiating corrective actions, as also refining supervisory processes and communications.

Let me elaborate a little on these areas.

(a) Unification of Supervisory Approach, Building Specialisation, Capacity and Skills in Supervision

8. In order to ensure a unified and systemic approach, a unified Department of Supervision (DoS) was created bringing all SEs, namely, Scheduled Commercial Banks, NBFCs and UCBs under one umbrella. Unifying the supervisory functions shall reduce the supervisory arbitrage and information asymmetries across SEs and address the complexities arising from their inter-connectedness. This will also help in the holistic understanding of systemic risks. Steps have been taken to improve the supervisory function through better capacity building and skilling of supervisors and for this purpose a separate College of Supervisors (CoS) has been set-up which is conducting extensive training programs in different areas. Supervisory specialisation is also being reinforced by way of creating specialised divisions for risk-based supervision of KYC / AML risk, data analytics, cyber security and IT examinations, among others.A Supervisory Action Framework has also been put in place which provides for graded early supervisory action depending on the frequency and severity of breaches identified.

(b) Strengthening Sound Governance and Internal Controls

1. Emphasis on risk culture

9. As banks are in the business of taking risks, sound risk culture lies at the heart of every decision that they take. In alignment with global developments, Reserve Bank too has made risk culture and business model analysis as part of its supervisory assessment. The focus has been to ensure that entities put in place a well-defined risk appetite framework, and business decision making is broadly in alignment with their risk appetite and risk bearing capacity.

2. Strengthening the assurance function

10. Reserve Bank attaches a lot of importance to the effective functioning of internal assurance functions in its financial entities and has issued revised guidance for concurrent, internal, as well as external audits in banks. The guidelines are expected to ensure that these audits act as an effective early warning, give greater clarity on supervisory expectations, avoid conflict of interest, provide sufficient authority / resources / independence to these functions, among others.

3. Compliance function

11. The compliance function in a bank is an integral part of corporate governance, as it can affect the bank’s reputation with its shareholders, customers, employees and the markets (BIS, 2005). The recent guidance by the Reserve Bank on compliance function casts responsibility of the compliance culture and management of compliance risk explicitly upon the Board. The guidance advises banks on laying down a Board-approved compliance policy, well-defined selection process for Chief Compliance Officer (CCO), a fixed tenure to CCOs, and requisite authority. Reserve Bank would expect that the standards of regulatory compliance will see considerable improvement going ahead.

(c) Tools for proactive off-site and on-site supervision

(i) Usage of Data and Analytical tools for offsite supervision

12. The offsite supervisory data is currently used in a variety of ways to aid in policy formulation, identify incipient stress, ascertain status of borrowers across lenders and check compliance to regulatory stipulations, among others. In addition to Central Repository of Information on large Credits (CRILC) and Central Fraud Registry (CFR), the data capabilities of RBI are in the process of being further upgraded through the revamped data warehouse, viz. the Centralized Information Management System (CIMS). It will encompass tools and applications for AI-ML, data visualisation and big data analytics.

13. As part of the forward-looking assessment of stress, various supervisory tools have been designed to identify vulnerable borrowers who have less ‘distance to default’ as well as vulnerable banks based on various parameters. Early Warning Systems and supervisory Stress Testing have been made an integral part of prudential supervision. Many Thematic Assessments are also being regularly carried out to identify system-wide issues and assess ‘conduct’ practices for taking corrective actions. Data dump analysis is also much more extensively used as part of our transaction testing exercise.

14. For continuous engagement with SEs, a web-based and an end-to-end workflow automation system has been developed. It has various functionalities including inspection, compliance and incident reporting for cyber security, etc. with a built-in remediation workflow, time tracking, notifications and alerts, Management Information System (MIS) reports and dashboards. This is being launched shortly.

Cyber-Security

15. With the proliferation of digital banking, cyber security has become an extremely important area of supervisory concern. To address this concern, the Reserve Bank has developed a model-based framework for assessing cyber risk in banks using various risk indicators, risk incidents, VA/PT, etc. Cyber drills are conducted based on hypothetical scenarios. Several Advisories and Alerts are issued on various cyber threats. Measures to build better awareness of cyber risks in supervised entities are continuing. The Digital Payment Security Control Guidelines were issued recently by RBI to set up a robust governance structure and implement common minimum standards of security controls. While a lot is being done in the cyber security space, but these risks are continuously evolving in the dynamic environment we operate in, and hence there should be constant vigil and continuous enhancements of IT systems.

(ii) On-site Supervisory Processes

16. Several measures have been taken to improve the rigour and efficacy of on-site processes, including the annual inspection process by adopting a calibrated approach. Focus areas get identified in advance, risk-based scoping is ensured, inspections are completed in time-bound manner, quality review process is strengthened, and supervisory communication is sharper and more focussed with clear outline of time-bound Risk Mitigation Plans (RMPs) to be implemented by the entities, among others. Additionally, direct engagements with the senior management of entities are much more frequent and intense.

Conclusion and the Way Forward

17. Globally, banking is seeing rapid transformations and questions on the traditional bank model are being raised. Technology players are challenging banks with offerings which provide more convenience, better reach and lower cost to customers. Developments in AI/ML, robotics and chat advisory, digitalisation, Distributed Ledger Technology (DLT), quant computing, cloud arrangements, data analytics, new ways of remote working, etc are giving benefits but also generating new risks. Climate change, KYC / AML, cyber security, virtual currencies as well as increasing reliance on outsourcing are some of the other major challenges that will need to be addressed.

18. Agile and creative thinking is going to be essential in staying ahead of the digital curve when it comes to the evolution of financial services. Financial institutions would need to experiment with new technologies and tailor their products and services in alignment with business strategy and competitive considerations as well as in compliance with existing laws and regulations. Leveraging on technology will also require enhanced financial investments, building expertise and capacities, proper resource allocation and further strengthening of the operational capabilities.

19. Lastly, in this ever evolving and challenging environment, ultimately it is the operations of a financial entity in terms of its governance standards, business model, risk culture, and assurance functions that will decide how well it fares in the long run. Reserve Bank would expect all its supervised entities to give due weightage and consideration to these elements.

20. With these words, I conclude my address. I thank the organisers for giving me this opportunity.

---

April 14, 2015

Dear All

Welcome to the refurbished site of the Reserve Bank of India.

The two most important features of the site are: One, in addition to the default site, the refurbished site also has all the information bifurcated functionwise; two, a much improved search – well, at least we think so but you be the judge.

With this makeover, we also take a small step into social media. We will now use Twitter (albeit one way) to send out alerts on the announcements we make and YouTube to place in public domain our press conferences, interviews of our top management, events, such as, town halls and of course, some films aimed at consumer literacy.

The site can be accessed through most browsers and devices; it also meets accessibility standards.

Please save the url of the refurbished site in your favourites as we will give up the existing site shortly and register or re-register yourselves for receiving RSS feeds for uninterrupted alerts from the Reserve Bank.

Do feel free to give us your feedback by clicking on the feedback button on the right hand corner of the refurbished site.

Thank you for your continued support.

Department of Communication

Reserve Bank of India

Next

1. At the outset, I would like to thank Sa-Dhan for inviting me to deliver this inaugural address. The theme for this year – ‘Revitalizing Financial Inclusion’ is an important issue at the current juncture. The loss of livelihoods and hardships caused by the pandemic calls for a reinvigorated push towards financial inclusion and micro credit for vulnerable and disadvantaged sections of the society who have been worst affected by the pandemic. There exists a strong case for using microfinance to transform social and economic structures and balance the welfare and profitability paradigm, which I would like to cover in my address.

2. As we all know, microfinance has emerged as one of most important financial tools to foster financial inclusion. It enables the poor and low-income households to increase their income levels, improve their overall standards of living and thereby come out of poverty. It also has the potential to become a vehicle to achieve national policies that target poverty reduction, women empowerment, assistance to vulnerable groups, and community development.

Evolutionary perspective

3. The not-for- profit origin of microfinance was built on the idea that it was a social and welfare proposition driven by the objective of improving social welfare by increasing the household income through a community-based approach. While several micro finance models have evolved subsequently across the globe, the search for delivering financial inclusion to the rural households and hinterlands, has evolved through two distinct approaches for developing a micro finance model in India, first – the bank led approach mainly through Self Help Group (SHG) – Bank Linkage Programme (SHG-BLP), and the second one through the specialised micro finance institutions led model. The recognition of and emphasis on micro finance at a larger scale and beginnings of a formalised structure of micro finance in India can be traced back to the SHG – bank linkage programme (SBLP) which was started as a pilot project in 1992 by National Bank for Agricultural and Rural Development (NABARD). This programme proved to be quite successful over the years. An initiative which began as a simple approach of improving and deepening rural credit has slowly got transformed into an all-inclusive programme for building financial and technological capabilities in rural India.

4. Over time, the bouquet of services under micro finance fold has expanded from only credit and thrift products to include micro insurance, micro pension, micro remittances, digital payments, amongst others. This development suggests a recognition of the importance of other financial services and the industry orientation, moving from lending to lower-income groups to pursuing the double objectives of social benefits with financial viability. Thus, while serving the underprivileged, microfinance also presents an opportunity for expanding the benefits of financial developments to those at the bottom of the pyramid.

5. When microfinance activities gained prominence in the 1990s, RBI recognized it as a new paradigm with immense potential and has been very supportive of its growth. When the need for regulating the MFIs was felt in early 2000s, a view was taken that MFIs are significantly different from other financial institutions – both in terms of institutional structure and product portfolio and needed to be regulated differently. Since then, our approach has been to carve out a distinct regulatory regime for these institutions in alignment with the specific nuances of the sector without diluting the principles of prudence, financial stability and customer interest.

6. One key milestone in the evolution of this regulatory framework was the constitution of the committee under the Chairmanship of Shri Y. H. Malegam. Based on the recommendations of this Committee, RBI introduced a comprehensive regulatory framework for NBFC-MFIs in December 2011. The regulations prescribed the eligibility criteria for microfinance loans which was linked to core features of microfinance i.e., lending of small amounts to borrowers belonging to low-income groups without collateral, with flexible repayment schedules. Besides, the regulations laid special emphasis on protection of borrowers and fair practices in lending such as transparency in charges, ceilings on margins and interest rates, non-coercive methods of recovery, measures to contain multiple lending and over-indebtedness.

7. Indian microfinance sector has witnessed phenomenal growth over past two decades in terms of increase in both – the number of institutions providing micro finance as also the quantum of credit made available to the micro finance customers. Presently, micro credit is delivered through a variety of institutional channels viz., scheduled commercial banks (SCBs), regional rural banks (RRBs), cooperative banks, non-banking financial companies (NBFCs), Section 8 companies and microfinance institutions (MFIs) registered as NBFCs as well as in other forms.

8. The small finance banks (SFBs) are the latest game in the town. The institutional landscape of the microfinance sector has also changed significantly after licensing of Small Finance Banks. One out of two entities which was granted approval for starting a universal bank in 2014 was an NBFC-MFI, while eight out of ten entities granted approval for starting Small Finance Banks in 2016 were NBFC-MFIs. This, apart from further consolidation in the sector, has led to significant changes in the market dynamics with the share of specialized MFIs standing at a little over 30 per cent as on June 30, 2021 in the overall gross loan portfolio of around ₹2.14 lakh crore in the sector. Thus, micro finance, as a financial activity can no longer said to be a bastion of specialized MFIs.

9. However, the current regulatory framework, which was put in place with the objective of making credit available to low-income households and to protect borrowers from harsh recovery practices of the lenders, is applicable only to NBFC-MFIs, whereas other lenders, who now have a share of around 70 per cent in the microfinance portfolio are not subjected to similar regulatory conditions. This has created a non-level playing field, posing difficulties for customers and has resulted in emergence of differing practices within the sector. While one would have expected that other lenders would also be guided by the intent of the abovementioned regulations applicable to NBFC- MFIs, that has not happened.

10. Mostly, there have been three distinct sets of criticisms against micro finance lenders – (i) that they lead their borrowers into debt-trap like situations; (ii) They charge usurious rates of interest often disproportionate to their funding and operational costs; and (iii) they deploy harsh recovery methods leading to distress amongst borrowers. These are issues which need to be critically introspected and addressed by the lenders to prevent recurrence of the crisis episodes.

11. The emerging dynamics in the microfinance sector as well as the concerns around customer protection therefore call for a review of the regulations so that all the regulated entities engaged in micro finance pursue the goal of customer protection within a well-calibrated and harmonized set-up. As you all may be aware; the Reserve Bank has recently come out with the Consultative Document (CD) on ‘Regulation of Microfinance’ seeking feedback from all the stakeholders. I wish to highlight some of the major aspects we are trying to address through this proposed framework.

Over-indebtedness and Multiple Lending

12. The protection of small borrowers has been enshrined in the NBFC-MFI regulations which do not permit more than two NBFC-MFIs to lend to the same borrower. Besides, there is a regulatory ceiling on the maximum amount that can be lent by an NBFC-MFI to a microfinance borrower. But it is observed that small borrowers are increasingly able to get multiple loans from several lenders well beyond their repayment capacity, contributing to over-indebtedness. The borrowers then end up defaulting on their repayment obligations. Then there are reports of coercive recovery practices by the entities looking to recover their dues. In this entire process what we see is a compromise with the basic tenet of responsible lending with the small and marginal borrowers ending up becoming victims of over-indebtedness.

13. In the proposed framework, it has therefore been suggested that the regulations should focus on repayment capacity of the borrowers rather than considering only indebtedness or indebtedness from only NBFC-MFIs in isolation. It has been proposed to address the issue of over-indebtedness by prescribing a common definition of microfinance loans which will be uniformly applicable to all lenders and linking loan amount to household income. The proposal is that the payment of interest and repayment of principal for all outstanding loans of the household at any point of time should not be more than 50 per cent of the household income.

Pricing of Micro finance Loans

14. Over the years, modifications in the regulatory instructions and clarifications governing loan pricing for MFIs have evolved in sync with changing circumstances. Following the recommendations of Malegam Committee, the guidelines issued in December 2011 prescribed a uniform margin cap (12 per cent for smaller NBFC-MFIs with portfolio of Rs. 100 crore and less and 10 per cent for others) along with a cap of 26 per cent on individual loans. Later, in 2012, the fixed interest rate ceiling of 26 per cent was removed while in April 2014 an additional criterion was introduced where in the lending rate was fixed at a multiple (2.75 times) of the average base rate of five largest commercial banks.

15. The regulatory ceiling on interest rate is applicable only to NBFC-MFIs. The prescription of a ceiling on lending rate for NBFC-MFIs has had an unintended consequence of not allowing competition to play out. There is a concern that the current guidelines, while prescribing an interest rate ceiling for only NBFC-MFIs, are effectively acting as a benchmark for other lenders as well. It is generally observed that interest rates of other lenders in micro finance segment also hover around this ceiling despite comparatively lower cost of funds. Even among NBFC-MFIs, increasing size of the operations leading to greater economy of scale has not resulted in any perceptible decline in their lending rates. As a result, it is the borrowers who may be getting deprived of the benefits of enhanced competition, monetary policy impulses as well as economies of scale.

16. While banks (including SFBs) have been advised to benchmark all new floating rate personal or retail loans to an external benchmark w.e.f. October 1, 2019, benchmark-based pricing has not been introduced for NBFCs, including NBFC-MFIs, yet. In view of the substantial divergence between the financing and operational costs among the lenders operating in the micro finance space, mandating any specific benchmark or any spread over a benchmark is unlikely to remove the constraints observed in the current system. Therefore, under the revised framework, it is proposed to do away with the prescribed ceiling and mandate all lenders to have a board approved policy on all-inclusive interest rate charged to the micro finance borrowers. The lenders would also have to make available a simplified factsheet on pricing of micro finance loans to the borrowers along with the disclosure of minimum, maximum, and average interest rates charged by them. The intention is to enable the market mechanism to come into play with the expectation that it will bring the lending rates downwards for the entire microfinance sector and empower the customer through transparent disclosures.

Customer Protection Measures

17. Now, let me dwell briefly upon one other critical aspect of customer protection that the Reserve Bank is looking to strengthen through the proposed changes. The inability/ difficulty of a borrower to repay his loan may be caused by several reasons such as unforeseen/ unavoidable adverse circumstances, natural calamities, over-indebtedness, etc. A cap on the loan repayment obligation of a household as a percentage of the household income is expected to address the inability of the microfinance borrowers to repay the loan.

18. Further, in this case borrowers often lack the type of collateral preferred by the lenders and whatever little collateral they have for pledging may be of little value for the lenders even while it might be highly valued by the borrower. Even if lenders take such collateral, it is more for inducing repayments rather than to recover losses. Therefore, it has been proposed to extend the collateral free nature of microfinance loans, as applicable to NBFC-MFIs, to all lenders in the micro finance space.

Way forward

19. I am sure everyone present here shares my concerns outlined above and appreciates the fact that negative consequences of over-indebtedness, harsh recovery practices and adverse outcomes arising from harassment of customers will adversely impact the MFI eco system. From society’s perspective, there are economic and social implications. While chasing higher asset growth and returns, lenders should not throw caution to the winds. Any slip-up through adverse actions of the MFIs may undo the tremendous progress achieved over the decades and the Sector can ill-afford to do that.

20. The roots and origin of micro finance should not be forgotten and sacrificed at the altar of bottom-line growth. There is no denying the fact that self-sufficiency and financial sustainability are the objectives that the lenders need to pursue. However, prioritization of profitability at the expense of social and welfare goals of the micro finance may not be an optimal outcome. Lenders need to remain cognizant of the fact that the balance sheet growth should not be built by compromising on the prudent conduct.

21. Micro finance in my view, at its core, should focus on understanding the needs of the customer first and offer them adequate levels of support through appropriate financial products. The customers of micro finance institutions often have lower level of financial awareness and literacy and are often too desperate to turn away any source of credit. Therefore, they need to be treated with care and empathy and should not be considered as a mere data points for investor presentations. The lenders in the micro finance space should not try to mimic the strategies of mainstream finance as those serving the micro borrowers have a greater need to balance the social objectives with their lending operations. Strong corporate governance could play a critical role in balancing seemingly exclusive but potentially complementary objectives of growth and social welfare from a long-term perspective.

22. As microfinance industry serves lower strata of the society and micro and small businesses, it has its own set of operational challenges and costs. Technology should help the industry to overcome this challenge. Microfinance lenders who are early adopters of technology are using customer data for designing tailored financial products, automating the processes for customer on-boarding, improving the credit monitoring process by getting early warning signs of stress in loan portfolio and enabling digital modes of loan and other payments. A few entities are designing apps that are vernacular and aid customer interaction through voice and chat conversations, thereby making them customer friendly, intuitive, and easy to use. Technology is thus serving to counter the key issues of high operating cost, credit risk and customer service.

23. The local connect and community-oriented approach through physical interaction has been the hallmark of micro finance sector. However, in the digital era, many micro finance lenders are also entering into partnership with fintech firms for delivery of services and sourcing of customers. While we encourage the use of technology, let me reiterate that the customer protection should not be compromised in the process and customer should get the similar experience in digital mode, if not better. The other areas of immediate focus for the sector include revamping of the risk management systems, improving the skills of the field level staff and institution of an effective grievance redressal system.

Concluding thoughts

24. For most of us, it is hard to imagine a life without financial services, but billions of people around the world do not have to imagine it but live through it every day. Unless we work to uplift this vast section of the society by bringing them into the formal financial fold, a billion aspirations may remain unfulfilled. Micro finance has come of age in India. It has developed into an important financial delivery mechanism. It has particularly helped women to become owners of assets, have an increased say in decision making and lead dignified lives. In current landscape, it is possible to expedite financial inclusion process by leveraging the flexibility provided by the multiple tech-led models for delivering a wide range of financial services. I am confident that the conference will throw up ideas which will enable the vibrant growth of the industry, while managing the challenges and addressing some of the key concerns which I have tried to highlight. From the regulatory side, we would look to foster the growth of the sector guided by the ultimate objective of financial inclusion and customer protection while providing a level playing field.

25. Let me conclude by wishing you all a very productive set of discussions over the course of the conference.

Thank you.

---