Challenges for the Central Bank
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Transcript Challenges for the Central Bank
Challenges & Concerns of the Central Bank:
Opportunities & Role for the Commercial Banks
Bankers’ Club
Thiruvananthapuram, Kerala
June 10, 2013
Harun R Khan
Deputy Governor
Reserve Bank of India
The 10 Challenges & Concerns
(i)
Propelling revival of domestic growth
(ii) Controlling persistent inflation
(iii) Mitigating external sector vulnerabilities
(iv) Deepening the financial markets
(v) Maintaining robust banking system
(vi) Ensuring integrity of the financial system
(vii) Building efficient Government banking business models
(viii) Moving towards a less-cash society
(ix) Better customer service orientation of the banks
(x) Enhancing the quality of financial inclusion
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I. Propelling revival of domestic growth
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Global economic activity remains moderated amidst signs of diverging growth
paths across major economies
Eurozone is still in recession, the US recovery continues to remain
sluggish, Japanese turnaround is mostly policy induced and the Chinese
growth is no longer in double digits
Indian recovery rather sharp and swift in 2009-10 (8.6 per cent) and
sustained in 2010-11 (9.3 per cent)
Thereafter, overall GDP growth witnessed sharp decline to 6.2 per cent in
2011-12 and further to 5 per cent in 2012-13 (provisional)
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China (Right Axis)
US
India (Right axis)
Eurozone
Japan
The challenge
declining domestic savings
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Growth cannot be revived without increasing the level of investment or gross
domestic capital formation
In India, the level of investment has been mostly financed by domestic
savings.
Due to high level of inflation for a long period
Decline in gross domestic savings as a percentage to GDP
38.0
37.0
36.0
35.0
34.0
33.0
32.0
31.0
30.0
36.8
34.6
33.7
33.4
34.0
32.0
30.8
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Decline in financial savings of households
Increase in physical savings
This trend is not conducive to growth as physical savings are not available for
further investment.
The challenge
external flows supplementing investments`
5
Investments in India were supplemented by external savings only
external current account deficit as proportion to GDP at an average of 1.2 per cent
during 2004-05 to 2008-09
thereafter, the CAD widened further and likely to reach a very high level of about
five (5) per cent.
implication for composition of external debt, debt servicing ratio and risks
associated with flight to safety
India has to finance higher level of investment through domestic savings
possible only through containing inflation so that households can get a positive
rate of return on their deposits
Challenge for Reserve Bank of India has been how to address growth risks
without losing control over inflation
Opportunities for banks
amidst nascent signs of revival of growth
6
The manufacturing sector
share of the sector in GDP stagnated at around 15 per cent for the last ten years
competitive manufacturing sector is necessary for
taking advantage of the demographic surge and sustaining growth
the New Manufacturing Policy aims enabling manufacturing to contribute at least 25
per cent of GDP in the next one decade and create additional 100 million jobs.
The MSME sector
deceleration in credit observed
Kamath Committee looked into the entire gamut of credit flow related issues
pertaining to the sector
as per a recent survey of the Confederation of Indian Industry, bankers expect 20
per cent increase in credit for the sector in the financial year 2013-14.
Opportunities for banks
amidst nascent signs of revival of growth
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The agriculture sector
step up credit delivery to the agriculture sector, particularly for small & marginal
farmers in aggregation models, investment credit and for value addition in the
sector
with expected normal monsoon and good levels of harvests, increasing purchasing
power and huge labour shortage for farm activities, demand for consumer goods
and capital goods like farm equipments is likely to register growth
The housing sector
a recent survey of the CNN Money has identified housing as the primary driver of
economic growth this year
the existing levels of mortgage penetration remain stagnant at around 7 per cent of
the GDP
reflects the potential to grow at a rapid pace
housing is the second largest generator of employment, next only to agriculture,
with both forward and backward linkages in nearly 300 sub-sectors
Opportunities for banks
amidst nascent signs of revival of growth
8
The infrastructure sector
development of adequate and quality infrastructure is necessary to maintain the
growth momentum
financial intermediaries, such as, banks have a critical role to play
banking services required for the entire life cycle of the project
spread across a wide spectrum of products including advisory, lending, transaction banking, debt and
equity raising, etc.
new opportunities of takeout finance, infrastructure debt funds for better ALM.
II. Controlling persistent inflation
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The average WPI inflation rate was 3.8 per cent in 2009-10, shot up to 9.6
per cent in 2010-12 and moderated marginally to 8.9 per cent and 7.4 per
cent in 2010-11 and 2012-13 respectively
Major causes of persistence – demand and supply side factors
high fiscal deficit aiding demand pressures, rising food prices due to structural factors like
income levels of people, change in dietary habits with focus on proteins
inefficient supply chain management (1-2-3-4 phenomenon)
acceleration of wages, particularly rural wages
high commodity prices
The challenge is to strike a balance between the two primary objectives of
monetary policy
the threshold level of inflation in India is about five per cent beyond which inflation
harms growth by putting sands on the wheels of commerce
The challenge
fiscal consolidation and inflation control
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Not only the household savings but also government saving which could be
augmented by inflation control
higher the inflation, higher is the net government expenditure, leading to higher
gross fiscal deficit, other things remaining constant
As the Union Government is currently under the fiscal consolidation program,
unless inflation is controlled, it may be difficult to check revenue expenditures.
inflation control will help achieve fiscal consolidation without cutting capital
expenditure.
The challenge
food inflation
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Food inflation persisting despite large buffer stocks
upward pressure reinforced with significant increase in the MSPs of most cereals
and pulses
Cost of agriculture has been going up sharply
Volatility in prices of vegetables and fruits
Significant price increase in protein rich food items, such as, eggs, fish and
meat
The persistence of food inflation calls for
a relook at the agriculture price policy of the country
revisit of the buffer stock policy
Role of the banks
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Bank financing for mitigating production constraints and infrastructural deficits
focussing on supply and value chain financing
monitoring productivity of increasing bank credit to the agriculture sector
helping in risk-proofing of the agriculture sector by adopting a credit plus
approach
ensuring timely, adequate and sustainable credit flows to various segments of
the economy to remove supply bottlenecks
micro financing of vegetable vendors
III. Mitigating external sector vulnerabilities
External sector has been a source of strength for the Indian economy
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Indian economy is, however, affected by 7C channels: Commerce, Capital flows &
Confidence, Contagion, Contamination, Currency risk and Credit Rating,
vulnerabilities have increased mainly due to unusually high CAD
Capital flows cannot be taken for granted as QE by the advanced economies
may not continue indefinitely
a significant proportion of capital flows are in the form of volatile FII and debt flows
Moderation in exports due to slowdown in developed economies
exports more severely impacted than most of the peer group economies
Restraining imports of gold
Oil and gold account for 45 per cent of total merchandise imports
uncertainty regarding persistence of softening bias in international commodity prices &
consumer behaviour regarding gold demand
import may grow as the economy picks up and thereby the CAD may remain high in the coming
period.
Deceleration in private transfers
The World Bank April 2013 Report on Remittances forecast
remittances received by South Asian countries including India, would grow at a lower rate of 6.9
percent in 2013 as compared to 12.3 per cent in 2012.
Role of banks
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Banks should provide adequate, timely and cost effective lines of funding for
exports
implementation of Padmanabhan Committee recommendations
Banks need to tap their widespread network of branches spread across 55
countries for
providing inputs to the Indian exporters for exploring new markets and creating a
niche in the untapped economies
attracting investment especially in the form of foreign direct investments for
enhancing technology-led production capacity and also for addressing the CAD
challenges
taping the Indian diaspora
Checking the gold rush – implementing RBI directions in letter and spirit
Refrain from aggressive selling of gold coins
such an activity should not be construed as the core business activity
Banks should encourage IIBs using their wide customer base
IV. Deepening financial markets
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Deeper and broader financial markets desirable for public policy objectives
critical for improving the efficiency of capital allocation within the economy
Predominantly institutional participation in the G-Sec market
Reserve Bank of India has recognized merit in promoting retail participation.
small and medium sized investors enabled to participate in the primary auction of G-Sec through
a “Scheme of Non-competitive Bidding”
Primary Dealers (PDs) have been mandated minimum retailing targets.
Corporate bond market is relatively under developed
developing a vibrant corporate bond market has become an important agenda
Challenges include
taking measures to improve liquidity,
setting up a suitable framework for market making in corporate bonds,
providing tools to manage credit, market and liquidity risks,
developing a smooth yield curve for the government securities market for efficient
pricing of the corporate bonds,
calibrated opening of the corporate bond market to the foreign investors,
lack of appetite for innovative products
Role of banks
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Promoting expansion of investor base in G-sec/corporate bonds
Low levels of participation of the treasuries of the public sector banks
look at the prevailing incentive structure so that banks can participate actively in
the market with a supportive risk management framework
V. Maintaining robust banking system
capital requirements
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Over a decade and a half, the health and resilience of the banking system
has improved
asset quality has improved significantly since the reforms in the banking sector
successfully migrated to Basel II and now moving towards full implementation of
Basel III
Since 2010 there has been some deterioration in the resilience and stability
of the banking system
FSR of December 2012 observed increasing risks to the banking sector
primary factors include tight liquidity, deteriorating asset quality and reduced capital
ratio
Capital adequacy ratios of banks in India have been declining though they
currently remain well above the regulatory prescription
banks presently meet the minimum capital requirements of Basel III at an
aggregate level but individual banks may have to top up their capital
as banking penetration needs become more pronounced and as the economy goes
through a structural transformation, Indian banks will need to raise additional capital
both to support the growth process and to meeting regulatory requirements.
Maintaining robust banking system
unhedged exposures
lure of cheaper foreign currency denominated funds has led to higher
foreign currency borrowings by Indian corporates
external debt helps the corporate sector to diversify the funding sources
excessive reliance, however, could pose balance sheet risks
risk is magnified when availability of funding liquidity is subject to sharp
volatility in the international markets
heightened volatility makes the debt rollovers difficult or at high interest rates
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Maintaining robust banking system
asset quality
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Recent trends in the asset quality of the banking system have been
somewhat disquieting
in 2012-13, the gross NPAs of banks increased by 31.8 per cent while restructured
standard advances increased by over 40 per cent.
primarily due to the prevailing domestic & global macroeconomic situation and underlying
issues in credit assessment and NPA management of banks
Q4 of 2013 has recorded an improvement in the asset quality though too early to
state with certainty that the trend of deteriorating asset quality has reversed
In view of extraordinary increase in restructuring of advances, a Working
Group (Chairman: Shri. B Mahapatra) has reviewed the existing prudential
guidelines
implementation of these measures has commenced and will contribute to increased
resilience of the banking system and more transparent accounting of asset quality
Role of banks
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Banks need to be sensitive to
Improve the credit appraisal and monitoring mechanism
reducing reliance on short term liabilities, especially volatile liabilities, such as, bulk
deposits
rigorous evaluation of the unhedged forex exposure risks and build it into pricing of
credit
Banks will need to provide concerted attention to their ALM policies
reduce reliance on short term and volatile liabilities
issue of long-term bonds (as recommended by Vohra Committee)
Risk management systems and early warning systems need to be improved
Improve the information sharing mechanism
VI. Ensuring integrity of the financial
system
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High level of trust and integrity in the financial system is an important
requirement if the financial sector has to serve the real sector in a sustainable
manner
Recent episodes have highlighted certain irregularities/deviations/aberrations
in conduct of banking transactions
failure to adhere to the laid down guidelines pertaining to KYC/AML
Reserve Bank is contemplating tightening of wealth management guidelines
A major source of unethical practices has been the incentive structure
no segregation marketing function from the approval process
incentive structures not aligned to desired behaviors across the organization
penalty by regulators is not the panacea
Role of banks
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Commitment to regulatory compliance in letter and spirit by the bank
managements is necessary
Banks should address the incentive structure at bank branches
segregate marketing functions from the approval process
incentive structures are aligned to desired behaviors across the organization
Banks should check strength of their internal systems
for identifying missing or invalid KYC profile certifications required to block
transactions
Critical to strike balance between integrity of the financial system and
expansion of banking outreach for financial inclusion
Hassle-free KYC procedure for general customers, particularly those doing
small ticket transactions
VII. Building efficient Government
banking business models
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Growing need for electronification of Central and State Governments
transaction processing
migration would bring in higher efficiencies in operations
Banks would be spared of the work relating to issue, handling, clearing and
passing of paper based cheques which come with the attendant risks.
processing in a ‘Straight Through’ manner using CBS platforms
e-transactions are superior to paper instruments in terms of traceability,
transparency and efficiency, apart from being a green initiative
Governments of Madhya Pradesh, Odisha, West Bengal, Uttar Pradesh and
Uttarakhand have initiated implementation of e-receipts
E-Kuber
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e-Kuber of RBI was implemented about a year ago and is one of the foremost
central bank oriented Core Banking Systems of the world and has stabilised
well.
Provision of a single account for each bank across the country, decentralised
access to this account from anywhere, anytime usage using the portal based
services in a safe manner and the ease of operations are some of the
features of the e-Kuber which have been well received by banks.
Government users can view their balances – of all types including the Ways
and Means Advances, drawings, funds positions and the like – all in a
consolidated manner through the e-Kuber so as to help then in better funds
management.
The capability of consolidating revenue collections by banks through the eKuber offers the potential for better flexibility for the Government in managing
its finances apart from moving over towards higher levels of electronic based
banking
Role of banks
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Direct Benefit Transfer (DBT) envisages transfer of benefits by lessening the tiers
involved in flow of the transactions,
accurate targeting of the beneficiary and curbing pilferage and duplication.
rollout of DBT presents a number of challenges
but it also presents a great business prospect as banks will be paid a transaction fee of one per
cent of the value for every payment made
Creates a big market of small customers
Banks should recognize the immense business potential of conducting
government business
earlier models should be replaced with technology led banking platforms and payment
system infrastructure
benefit of getting agency commission
Greater efficiency in handling government business will create a distinct brandvalue for the bank
enable greater share of business
widening of customer base by catering to various departments of the Government
VIII. Moving towards a less-cash
society
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The dominance of cash oriented economy and informal financial system,
organization of economic activity, proportion of migrant workers are factors
driving the need for cash in a society – cash to GDP high at 13%
Cash is widely used
for the Confidence it exudes, has very high Acceptability, is extremely Safe for
undertaking and completing a financial transaction and is Highly liquid
Challenges to Reserve Bank
ensuring availability of adequate quantity of banknotes and coins in the system,
ensuring good quality banknotes and ascertaining their genuineness
high cost of printing and distribution
Associated risks for individuals
theft, idle cash itself does not generate income, time and cost for making payments can
be exorbitantly high and the danger of forged currency notes in circulation.
Challenges for the banks
cost of handling cash is higher as compared to electronic modes - more transaction time
more expensive to maintain security and operational hassles (e.g., segregation of reissuable notes, detection of forgeries)
Role of banks
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Reserve Bank has been promoting
usage of electronic payments like mobile payments, payments through internet
banking and card based banking
wider participation to ensure wide network of payment system infrastructure
greater security features in the e-payments systems – February 28, 2013 guidelines
exploring alternate payment system mechanism (e.g. GIRO)
Banks need to rationalize their network and promote non-cash instruments
Banks need to tap technologies to cater to the growing needs of the
customers and also to the growing number of customers
notion that customers are unable to adopt to technology stands defeated with wide
success and usage of mobile phones
Banks need to focus on 7A’s (Accessibility, Availability, Awareness, Acceptability,
Affordability, Assurance and Appropriateness) to promote cash-less banking
Partner with RBI in its e-BAAT like initiatives to popularize electronic banking
IX. Better customer service
orientation of banks
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Banks need to be wary of retaining existing customers while working towards
expanding the customer base
key to an efficient and courteous customer service emanates from having the right
orientation keeping different customer segment in mind
pensioners require special attention and assistance
Reserve Bank has issued several instructions to ensure efficient customer service
Survey by Ernst & Young
for the banks to remain competitive, they must
give customers the opportunity to choose by making service offers more transparent, and
rebalance fee structures to achieve clarity and sustainability required by regulators and
investors
Implementation of Damodaran Committee recommendations
Banks need to develop business strategies that would amalgamate strength
and immediacy of erstwhile style of banking with the capabilities of nex-Gen
multi-media collaborative technology
translates into re-orientation of customer service beyond applications that provide
solutions to problems and needs of today – focus on Gen-next customers
X. Quality of financial inclusion
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financial inclusion has emerged as the buzzword in the Indian financial system
banks have collaborated with business correspondents (BCs) to extend the formal
banking services to unbanked regions and people
quantity became the more important factor than the quality to show the extent of
financial inclusion
significant number of No-Frill Accounts remained inoperative
meaningful financial inclusion hinges on four critical parameters
all adults in each family have an operative bank account through which regular credits
and withdrawals take place
providing small overdraft/credit facilities to the people who need it
providing remittance services through the banks and
providing micro insurance through the bank
sustaining momentum of financial inclusion is dependent on efforts for economic
inclusion
Providing financial services alone would not suffice
Economic inclusion efforts require not only banking the unbanked but also retaining and
engaging current and potential bank customers to prevent them from becoming
unbanked or under-banked
Role of bankers
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Plugging the loopholes in the ICT based BC models
Increase the levels of engagement at the grass-root level
Ensure higher levels of financial activities through the banking system
even if it involves low ticket business
Provide more meaning to the spirit of financial inclusion than to the statistics of
financial inclusion
Financial inclusion is critical from the perspective of financial stability
small value deposits from the large source of customers at the ‘bottom of the pyramid’ offer more
stability and resilience to the deposit base
Banks should appreciate that financial inclusion is much beyond social obligation
and business proposition
Review and replicate the Ernakulam model of meaningful financial inclusion
Concluding thoughts
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Be sensitive to the 10 challenges and concerns of Reserve Bank viz.,
propelling revival of domestic growth,
controlling persistent inflation,
mitigating external sector vulnerabilities,
deepening the financial markets,
maintaining robust banking system,
ensuring integrity of the financial system,
building efficient Government banking business models,
moving towards a less-cash society,
better customer service orientation of the banks
enhancing the quality of financial inclusion
and the role that banks play in meeting these challenges and converting them
as opportunities for sustainable business growth with enhanced brand equity
Concluding thoughts
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Given the magnitude of challenges, Reserve Bank attaches a lot of
significance to the role of banks
the traditional role of financial intermediation played by banks needs to be
redefined
Banks need to play a more pro-active role
continuously strive to raise the levels of awareness of general public so as
to increase usage of banking channels
Recent survey by Gallup revealed that nearly 70 per cent of the respondents
reposed faith in the Indian banking system
recent findings of non-adherence to KYC/AML norms, deterioration of asset
quality, lack of proper MIS, unethical practices of some of the banks’ staff in
mis-selling financial products have potential of denting the respectability of
the system
Hence, time to take a deep breath and then start off to do
right things rightly
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Thank you for your patient hearing.