A slew of measures taken by the central bank of late, which are aimed at easing norms that govern various Indian banks’ activities, required some amount of courage even though the Reserve Bank of India’s stance remains cautionary, said its Governor, Sanjay Malhotra.
Speaking at a conclave organised by the State Bank of India in Mumbai on Friday, Malhotra said the liberalisation of banking norms comes with the need for banks to self-govern and keep growing, failing which, the apex bank “possesses sufficient tools to reign-in any errant behaviour”.
Last month, the RBI announced a raft of measures and intents, including those allowing banks to fund domestic acquisitions, and foreign borrowings for real estate sector, among others.
“...while we move with caution, we need to display courage,” Malhotra said, explaining the rationale beyond the moves.
While he has been a proponent of ensuring ease-of-doing-business, the RBI governor said compromising financial stability while chasing short-term growth can extract costs through long term impact on growth.
The changes, he said, are based on a bedrock of financial stability achieved by the RBI over the last decade. Yet, the central bank also needs to be conscious of the economic context and play a balancing act.
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“All these measures are balanced and appropriate, built on the bedrock of a banking system that has been systematically fortified over the last decade, with financial stability remaining the unwavering cornerstone of a policy architecture,” Malhotra said.
Increasing efficiency and promoting innovation come under the ambit of the RBI, however, “there are no free lunches”, he added.
Quoting from Shakespeare’s classic play Romeo and Juliet, the RBI governor hinted that the central bank would “go wisely and slow”.
“Economic interest warrants increasing efficiency and promoting innovation, which also is the duty of RBI. We recognise that just like there are no free lunches, regulation to enhance stability too is not devoid of costs,” he said.
He also said that the RBI does not wish to micromanage, adding that no regulator can or should substitute for boardroom judgment and each case has to be looked at with merit by a regulated entity.
Comparing the role of a regulator to that of a gardener, Malhotra said the central bank will continue to monitor the growth of the banks and “prune unwanted growth” to “shape a collective, orderly, beautiful garden”.
About easing of financing norms for banks, Malhotra said the acquisition finance move will benefit the real economy once implemented, and that it comes with guardrails like limiting bank funding to 70 per cent of deal value.
The liberalisation moves on external commercial borrowing come amid strengthening external sector and strong inflows, the governor said, calling it as a “natural step” in India’s financial evolution.
He added that the RBI’s projections are showing that the capital flows will remain “quite strong” even during the remainder of the fiscal year.
Clarifying the move to allow real estate companies to borrow from foreign banks, Malhotra said the ECB is permitted only for projects compliant with foreign direct investment (FDI) norms, and will remain prohibited for any speculative activity or land buys.
“The RBI is trying to make rule-making more open, more data- and evidence-driven, after public consultation and assessing the impact of the move,” he said.
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