We would like domestic and international audiences to see that a lot is being done, said Rajan as he announced measures ranging from steps aimed at shoring up the rupee to short- and medium-term reforms for the banking sector.
For starters, the RBI will open a special window for banks to swap foreign currency non-resident (FCNR) dollar deposits at a fixed rate of 3.5% per annum for the tenor of the deposits. The facility will be available for deposits of a minimum tenor of three years.
The cost of funds for banks on these deposits should come down as a result of these measures, explained Jamal Mecklai of Mecklai Financial.
The RBI has also eased its stance on permitting exporters and importers to re-book cancelled forward contracts. Exporters can now do this to the extent of 50% of the value of the cancelled contracts compared to 25% earlier while importers can use this facility up to 25% of cancelled contract value.
The RBI has also allowed banks to raise 100% of unimpaired Tier 1 capital through overseas borrowings a measure that could lead to banks raising more funds in the overseas markets to meet capital requirements
Together with the government and regulators such as Sebi, we will steadily but surely liberalise our markets as well as restrictions on investment and position taking, said Rajan. He also spoke of greater internationalisation of the rupee
Even though RBI measures were announced after market hours, the rupee saw a steep recovery in trade closing at 67.09 versus 67.73 on Tuesday.
The Rupee has fallen more than 20% since the start of this year and is one of the worst performing currencies globally
"The tone of the Governor's speech was much mire hands on than most previous Governors and that could be an excellent signal," summarised Mecklai
Meantime, Rajan expects the RBI to give out new bank licences by January 2014 before Deputy Governor Anand Sinha who has been working on the new licences retires. The external committee to examine licences will be headed by Dr. Bimal Jalan.
26 companies, including corporate groups like Tata Sons, Reliance Capital, L&T and others, have applied for new bank licences.
The RBI will give out licences with the highest standards of transparency, assured Rajan
Rajan, however, has a broader agenda for banks in mind saying that they would like to look at differentiated licences in line with recommendations made in RBI's recent paper on banking structures.
The possibility of continuous or on-tap licencing and possibility of converting large urban cooperative banks into commercial banks will also be considered in line with the recent suggestions from the RBI staff.
In the meantime, Rajan promises to try and reduce the constraints on the banking sector in the form of mandated investments in government securities. Currently, banks are required to invest 23% of Net Demand and Time Liabilities (NDTL) in government securities to meet the Statutory Liquidity Ratio (SLR)
This cannot be done overnight , of course. As government finances improve, the scope for such reduction will increase, said the incoming governor
In another change in banking policy, the RBI will no longer limit the number and scope of branches that a commercial bank can open. Banks will no longer need to approach the RBI for permission to open a branch.
The RBI currently regulates the number of branches that banks can open particularly in tier-1, tier-2 centres.
Priroity sector requirements of banks could also see an overhaul. A committee under RBI board member Nachiket Mor has been set up to rethink priority sector lending requirements in the current economic context.
Let us remember that the goal is greater financial access in all parts of the country rather than meeting bureaucratic norms, said Rajan.
Banks are currently required to lend 40% of adjusted net bank credit (ANBC) to sectors like agriculture, small and medium enterprises, education, housing among other under the RBI's priority sector norms.
"All that he has said is very welcome. The steps are well thought out and will do a lot of good to the banking sector, said Pratip Chaudhuri, Chairman, State Bank of India."
While Rajan promised banks reforms, he talked tough on the issue of large NPAs telling banks clearly that bad loans have to be reigned in. Rajan said that a panel headed by Deputy Governor K C Chakrabarty will examine large NPAs and the recovery and restructuring of bad loans. Based on this the RBI will announce steps to curtail the bad loan problem in the banking sector.
Gross NPAs for the banking system stood at 3.8% at the end of the June 2013 quarter. Last year banks restructured Rs 76,479cr worth of loans through the corporate debt restructuring cell. In the July-August period, cases worth Rs 20,669 crore were referred to the CDR cell for debt recast.
While Rajan announced a series of measures and intentions, he remained tight lipped on his stance on monetary policy. He however confirmed that the mid quarter review of monetary policy will now be released on September 20 instead of September 18, perhaps as a way to account for any change in the US Federal Reserve's quantitative easing policies. The US Fed will announce its policy on September 18.
Meantime, in a move aimed at cushioning households from inflation, the RBI governor plans to introduced inflation indexed savings certificates linked to consumer price inflation.