Finance thrives when financial infrastructure is strong. The RBI has been working hard to improve the financial infrastructure of the country – it has made tremendous advances, for example, in strengthening the payment and settlement systems in the country. Similarly, it has been working on improving information sharing through agencies such as credit bureaus and rating agencies. I propose to carry on such work, which will be extremely important to enhance the safety and speed of flows as well as the quality and quantity of lending in the country.
On the retail side, I particularly want to emphasise the use of the unique ID, Aadhaar, in building individual credit histories. This will be the foundation of a revolution in retail credit.
For small and medium firms, we intend to facilitate Electronic Bill Factoring Exchanges, whereby MSME bills against large companies can be accepted electronically and auctioned so that MSMEs are paid promptly. This was a proposal in the report of my Committee on Financial Sector reforms in 2008, and I intend to see it carried out.
Finance is not just about lending, it is about recovering loans also. We have to improve the efficiency of the recovery system, especially at a time of economic uncertainty like the present. Recovery should be focused on efficiency and fairness – preserving the value of underlying valuable assets and jobs where possible, even while redeploying unviable assets to new uses and compensating employees fairly. All this should be done while ensuring that contractual priorities are met. The system has to be tolerant of genuine difficulty while coming down hard on mismanagement or fraud.
Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures.
Most immediately, we need to accelerate the working of Debt Recovery Tribunals and Asset Reconstruction Companies. Deputy Governor Anand Sinha and I will be examining the necessary steps.
I have asked Deputy Governor Dr. Chakrabarty to take a close look at rising NPAs and the restructuring/recovery process, and we too will be taking next steps shortly. RBI proposes to collect credit data and examine large common exposures across banks. This will enable the creation of a central repository on large credits, which we will share with the banks. This will enable banks themselves to be aware of building leverage and common exposures.
While the resumption of stalled projects and stronger growth will alleviate some of the banking system difficulties, we will encourage banks to clean up their balance sheets, and commit to a capital raising programme where necessary. The bad loan problem is not alarming yet, but it will only fester and grow if left unaddressed.
We will also follow the FSLRC suggestion of setting up an enhanced resolution structure for financial firms. The working group on resolution regimes for financial institutions is looking at this and we will examine its recommendations and take action soon after.
Everyone has a right to a safe investment vehicle, to the ability to transfer remittances to loved ones, to insurance, to obtain direct benefits from the government without costly intervening intermediaries, and to raise funding for viable investment opportunities. In addition, access to credit to smooth consumption needs or to tide over emergencies is desirable, especially for households in the lower income deciles, when it does not impose unserviceable debt loads. The Reserve Bank will continue to play its part in making all this possible.
In particular, I want to announce a number of specific actions:
First, households have expressed a desire to be protected against CPI inflation. Together with the government, we will issue Inflation Indexed Savings Certificates linked to the CPI New Index to retail investors by end- November 2013.
Second, we will implement a national giro-based Indian Bill Payment System such that households will be able to use bank accounts to pay school fees utilities, medical bills, and make person to person transfers electronically. We want to make payments anywhere anytime a reality.
Third, only banks are currently allowed to deploy Point-of-Sale terminals, and these are largely set up by a few banks in urban areas. As announced in the Annual Monetary Policy statement, we will facilitate the setting up of “white” POS devices and mini ATMs by non-bank entities to cover the country so as to improve access to financial services in rural and remote areas.
Fourth, currently holders of pre-paid instruments issued by non-bank entities are not allowed to withdraw cash from the outstanding balances in their pre-paid cards or electronic wallets. Given the vast potential of such instruments in meeting payments and remittance needs in remote areas, we intend to conduct a pilot enabling cash payments using such instruments and Aadhaar based identification.
Finally, there is substantial potential for mobile based payments. We will set up a Technical Committee to examine the feasibility of using encrypted SMS-based funds transfer using an application that can run on any type of handset. We will also work to get banks and mobile companies to cooperate in rolling out mobile payments. Mobile payments can be a game changer both in the financial sector as well as to mobile companies.
This is part of my short term time table for the Reserve Bank. It involves considerable change, and change is risky. But as India develops, not changing is even riskier. We have to keep what is good about our system, of which there is a tremendous amount, even while acting differently where warranted. The RBI has always changed when needed, not following the latest fad, but doing what is necessary. I intend to work with my excellent colleagues at the Reserve Bank, the senior management of which is represented around this table, to achieve the change we need.
Finally, a personal note: Any entrant to the central bank governorship probably starts at the height of their popularity. Some of the actions I take will not be popular. The Governorship of the Central Bank is not meant to win one votes or Facebook “likes”. But I hope to do the right thing, no matter what the criticism, even while looking to learn from the criticism – Rudyard Kipling put it better when he mused about the requirements of an ideal central banker in his poem “If”:
If you can trust yourself when all men doubt you, But make allowance for their doubting too:
Kipling’s reference to “men” only dates these lines, but his words are clear.
We will fill in details of what we have announced shortly, and lay out a broader roadmap of reforms soon after. Appropriate notifications will be issued shortly. As this is underway, we will turn to preparing the mid quarter policy statement.
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