The Indian banking sector and non-banking financial company (NBFC) sector continues to be strong even as their exposure to the Adani Group has come under the microscope, says Reserve Bank of India governor Shaktikanta Das. The strength, size and resilience of the Indian banking system is now much larger and stronger to be affected by an individual incident or a case like this, he said in a press conference after the bank’s monetary policy announcement. Excerpts:
Your inflation forecast for 2023-24 (April-March) is 5.3% and the forecast for January-March of 2024 is 5.6%. What is the rationale behind the increase in forecast for January-March?
Deputy governor Michael Patra: The average inflation is lower in 2023-24 than in 2022-23. You specifically mentioned it being higher in the second half of 2023-24; that is because of the base effect of this year playing out. That is why it is higher.
When the external members are saying that inflation is easing, why is there still an indication that there may still be a rate hike and not a pause?
Governor Das: Ultimately, the MPC decision is the majority decision. With regard to indication, it is not possible to say anything. In the current tightening cycle, with regard to rates, we have refrained from giving any forward guidance. It may become counter-productive. We are not giving any forward guidance. We have said that we will be extremely watchful of the incoming data, the outlook on inflation and what is happening in the overall economy. Based on that, we will decide going into the future months.
While the gap between credit and deposit growth has reduced since the last policy, it still remains quite wide. With the prospects for credit growth rising sharply, how long can banks continue to have the 400-500 basis point gap between credit and deposit growth rates?
Patra: The difference has narrowed but there is still a difference. It is really up to the banks to mobilise deposits and make up the gap. We are doing so through certificate of deposits and reducing their non-statutory liquidity ratio investments. But, they need to mobilise deposits on their own to meet the gap.
Deputy governor MK Jain: There is an increase in the deposits also. We have analysed the sources of funding and we have seen that the sources of funding are coming from deposits and borrowings. The credit-to-deposit ratio for the banking sector has increased a bit but is still within the range. The liquidity coverage ratio is still at very comfortable levels and is much higher than the regulatory requirement of 100%.
What will guide your decision to pause the interest rate hikes going ahead? Will it be guided by the actions of other central banks?
Patra: We have nudged real policy rate into positive territory. Its level will be decided by evolving growth and inflation trajectory. We take all developments in the world into account, but monetary policy has an exclusive domestic orientation. It will react to domestic developments.
What is the total exposure of banks and NBFCs to the Adani Group?
Das: We do not publicly discuss individual cases and their numbers. In the last three-to-four years, the Reserve Bank of India has taken a number of steps to strengthen the resilience of Indian banks. We have come out with clear guidelines to regulate the governance in Indian banks. We have issued guidelines about functioning of the audit committees. We have issued guidelines for the functioning of the risk-management committees. We have now made it mandatory to appoint chief risk officers in banks. We have also made it mandatory for appointment of chief compliance officers in the banks. Through our regulations, we have given the desired level of autonomy to the chief risk officer and chief compliance officer with regard to his functioning within the bank. The chief risk officer reports directly to the audit committee. In the last two years, we have also rationalised large exposure norms. At this point of time, I would like to add that the Indian banking sector and the non-banking financial company sector continue to be resilient and strong.
Will you be giving any guidance to domestic banks about their exposure to the Adani Group going ahead?
Das: At the Reserve Bank of India, we have made our own assessment. The large exposure guidelines prescribed by the RBI are fully complied with by all banks. The strength, size and resilience of the Indian banking system is now much larger and stronger to be affected by an individual incident or a case like this. The banking system is strong. I think this perception is coming because of the market capitalisation of the shares of the group. When banks lend money to a company or a group of companies, the banks do not lend on the basis of market capitalisation of that particular company. The banks lend on the basis of the strength of the company, the fundamentals of the company or strength and fundamentals of analysis if it is a greenfield project, the anticipated cash flows. So many things go into the appraisal of the banks. The appraisal methods of Indian banks have improved significantly over the years. I would just reiterate again that the banking system is stable and continues to be strong.
Jain: Our domestic banks’ exposure is against the underlying assets, operating cashflow and projects under implementation. It is not based on market capitalisation. The exposure now is not very significant across all banks and NBFCs. The exposure against shares of domestic banks is insignificant.
