Shaktikanta Das, Governor, Reserve Bank of India while inaugurating the SBI’s 7th conclave on Banking and economy gave his keynote address on July 11, 2020, and his historic address covered the glorious past few years of the banking crisis, the economic impact of COVID 19 and the future ahead of the Indian banking. But as a writer and a banker with a couple of decades of working experience or exploration of its behavior for the past 5 decades, I want to proceed with his vision for future, efforts taken in the recent past and the effect of COVID 19 on Indian banking.
Prospects for Indian banking in future (Way forward)
Actions initiated in the recent past by RBI
Guided by the age-old wisdom summarized in Bagehot’s dictum1 that ascribes the role of Lender of Last Resort (LOLR) to the central bank, the Reserve Bank of India took a number of important historic measures to protect our financial system and support the real economy in the current crisis of pandemic and also the slow down in economy witnessed earlier.
1. “With repo rate cut of unprecedented 135 basis points between February 2019 and the onset of pandemics and food inflation in the second half of 2019-20, liquidity conditions were also kept in ample surplus since June 2019.
2. The fast-changing macroeconomic environment and the deteriorating outlook for growth necessitated off-cycle meetings of the Monetary Policy Committee (MPC) – first in March and then again in May 2020. The MPC decided to cumulatively cut the policy repo rate by 115 basis points over these two meetings, resulting in a total policy rate reduction of 250 basis points since February 2019.
3. The liquidity measures announced by the RBI since February 2020 aggregate to about ₹9.57 lakh crore (equivalent to about 4.7 percent of 2019-20 nominal GDP). Unheard of in the history of RBI, it kept itself aware of the current and looming financial crunch to take these measures. Instead of an ivory tower or lecturing mode, RBI converted itself to take timely actions.
4. The following financial figures may reveal the truth.(Information from his speech)
5. For the five years between 2015-16 and 2019-20, the Government was forced to infuse a total of Rs. 3.08 lakh crores, to improve the capital position of nationalized banks.
6. Following mind-blowing financial information may help us to understand the economy better.
7. “As a result of the efforts by both the Reserve Bank and the Government, the overhang of stressed assets in the banking system had declined and capital position had improved.
8. As per available numbers (some of which are provisional) at this point in time, the overall capital adequacy ratio for scheduled commercial banks (SCBs) stood at 14.8 percent as in March 2020, compared to 14.3 percent in March 2019.
9. The CRAR of PSBs had improved from 12.2 percent in March 2019 to 13.0 percent in March 2020.
10. The gross NPA ratio and net NPA ratio of SCBs stood at 8.3 percent and 2.9 percent in March 2020, compared to 9.1 percent and 3.7 percent as on March 2019, respectively.
11. The Provision Coverage Ratio (PCR) improved from 60.5 percent in March 2019 to 65.4 percent in March 2020, indicating higher resiliency in terms of risk absorption capacity.
12. The profitability of SCBs had also improved during the year. The gross and net NPAs of NBFCs stood at 6.4 percent and 3.2 percent as on March 31, 2020, as against 6.1 percent and 3.3 percent as on March 31, 2019.
13. Their CRAR declined marginally from 20.1 percent to 19.6 percent during 2019-20.”
The above financial information from the most authoritative source, i.e., RBI Governor now has ensured some peace of mind for any keen observer of our Indian economy.
We have known that after the appointment of the present Governor who came at a time when the energy levels of RBI officials and the Finance Department needed much boost to uplift the economy, a large number of supervisory and regulatory measures were initiated.
Being a brilliant senior bureaucrat with the best basic education from premier institutions, the present Governor had nothing to prove except that he could add more achievements to his cherished past record. I was one among those who wanted him to take up this challenging assignment which has not been a bed of roses for many brilliant professors from the West who ventured ahead to take up the role of RBI Governorship but could not achieve their set goals.
Let me lead you to the supervisory and regulatory initiatives of RBI as explained by the present RBI Governor in his speech.
He complemented SBI which helped in the timely resolution of the looming crisis of Yes Bank with the guidance of RBI to save its depositors setting a new direction of public-private partnership. With regard to the Punjab & Maharashtra Co-operative Bank, the Reserve Bank was engaged with all stakeholders to find out a workable solution, as losses are very high, eroding deposits by more than 50 percent. He further narrated the following steps taken to strengthen NBFCs in their functioning.
Case of Urban Co-operative Banks
The Governor explained the following steps which were necessitated by the frequent failure of the above institutions and resultant distress to all stakeholders related to them. Establishing a risk-based and pro-active supervisory approach, establishing an early warning system with a stress-testing framework, formation of an ‘umbrella organization, to provide liquidity, capital, IT and capacity-building support to UCBs, increasing the exposure limits of the UCBs have been to reduce credit concentration, and up-gradation of the priority sector targets so that UCBs would remain focused on their core segment – i.e., micro and small borrowers were mentioned.
The recent amendments in the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 to facilitate our supervision processes with respect to NBFCs and UCBs, respectively had its pride of place during his speech.
What was his response to Pandemic?
He chronicled the following steps taken on the onset of the unpredictable Pandemic:
His statement on the conclusion of the Pandemic was touching. “It is true that the pandemic poses a challenge of epic proportions; however, human grit – manifesting through collective efforts, intelligent choices, and innovation – will tremendously help us to come out of the present crisis. Mahatma Gandhi had said, “…the future depends on what you do today”. I have presented a bird’s eye view of the resolutions that the Reserve Bank has taken currently to combat this unprecedented situation. I am confident that these will complement the measures undertaken by the Government in achieving our policy objectives. Along with the tireless efforts of thousands of people and the undying spirit of our populace, I am optimistic that these policy actions will yield desired results.”
Being a great orator and a well-read man of letters with excellent achievements, the Governor’s words as mentioned below is worth considering to conclude this article.
“In the extraordinary circumstances that we face today, history could provide us with some useful guidance with respect to the role of central banks. Guided by the age-old wisdom summarized in Bagehot’s dictum1 that ascribes the role of Lender of Last Resort (LOLR) to the central bank, the Reserve Bank of India has taken a number of important historic measures to protect our financial system and support the real economy in the current crisis. While the eventual success of our policy responses will be known only after some time, they appear to have worked so far.”
I echo the feelings of the distinguished Governor that the future of India depends upon our hard work today.