'We are moving on bank consolidation measures'

When someone like Howard Davies, former Governor of the Bank of England and director of the London School of Economics, writes on the future of central banking, practising central bankers do take note. And that too, when India’s central bank comes in for a special mention.

On the morning of the mid-term review of the annual credit policy, Mr Davies had written an article saying that probably there is a case for a legislation to strengthen autonomy for RBI. As Davies said, it may not change, in any fundamental way, the current operations of the central bank, but it would be like a ‘sleeping policeman’.

Given the sensitivities involved, RBI governor YV Reddy just chose to laugh it off saying it depended on one’s views on the usefulness of a sleeping policeman. The Guv appeared relaxed and settled down to chat with ET on the credit policy. Excerpts:

ET: Is there a danger that the credit policy does not send a strong signal sensitising corporates to the risks of a rate hike in the near term ?

YVR: Interest rates is one signal. There is also an issue of possible supply inelasticities. In particular, how transient is the issue of primary food articles? If there is a good chance of rebalancing, then we only need to alert the market to the need for rebalancing and indicate the willingness to act, if necessary. The second issue is the balance between deposit and credit in the banking system.

That also has to be rebalanced in terms of savings and investment and in a broader sense, in terms of the price of capital. There may be no problem of liquidity now, but if there is demand at some stage and banks seek liquidity from RBI, they will have to pay more and there could be an element of uncertainity in getting the liquidity.

In which case, the rebalancing efforts can start from now. The expectation is that there could be a repricing of risk, repricing of deposits and loans taking into account these future prospects. But, it certainly does not exclude the possibility of movement of variables in future.

ET: What are the growth in credit factors other than demand ?

YVR. We had a rough view of the credit growth that would be consistent with stability. Last time, we indicated that 30% (credit growth) is slightly high and it has to go down towards 20%. After assessing the current situation, we came to the conclusion that there is a structural shift in the economy and the financing of economic activity through the credit channel. We still believe that it may have to be less than 30%. We are not sure where it is, but it will have to be less than 30%.

ET: After the banking sector reforms, it was widely expected that the next stage of reforms would envisage the corporate debt market. Moreover, banks are also handicapped in financing long-term projects because of the short-term nature of their liabilities?

YVR: We are fully committed to implement the recommendations of RH Patil committee report. That is very critical. Once that is done, we will be quite comfortable to go ahead with corporate debt market development. Banks have raised the issue of inadequate long-term funds and we have taken it on board.

But, besides corporate debt there are other areas for reform. These include the relationship between the banks and the NBFCs. We will soon be coming out with the circular on prudential guidelines for NBFCs.

The strength of the financial sector would necessarily depend on the strengh and stability of all the segments of the financial sector. We are already moving on consolidation measures, but when you have legacy issues, you have to have a non-disruptive movement giving due weightage to rights and obligations to all stakeholders.

ET: What is the position with restriction on branch expansion for those banks in the IPO scam. There is a veiw that RBI is restricting branch expansion to push consolidation in the cooperative segment?

YVR: We have had a series of meetings scheduled to discuss the measures that they have put in place and it should be possible to kick off the issue of licences. For urban cooperative banks, we have already indicated that they can convert extension counters to branches.

So far, all the banks where there is reasonable regulatory comfort, we are quite liberal in branch licensing. It is only with respect of few banks, who have not shown that risk control systems are in place, there are restrictions. They have now indicated that they have taken measures to put them in place. This is how it is in most countries.

ET :Some of the measures you outlined today while spelling liberalisation on the capital account front appear to be aimed at encouraging outflows to combat the appreciation of the rupee. Is that a fair assumption ?

YVR :It has nothing to do with currency management. Magnitudinally, liberalisation is cautious and step-by- step so that it does not make a significant dent in inflows and outflows. It is not intended to have mobilisation of capital for investment outside India. We are only saying that there is a facility available to invest outside, if you want to take it, then take it.

In any large economy, the domestic bias is close to 99% and the same thing applies to India. Secondly, as long as the overall macroeconomic frameowrk and tax incentive structure is conducive, the domestic bias will continue. Thirdly, the overall return on investments in domestic assets is still quite high.

But the reason we are doing this is to have the market determined exchange dominate the minds of people. This also disciplines policy makers as they are aware that domestic investors may take their money out if they are too much out of alignment.