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Mumbai , Nov. 4

"DO you want me to give the interview in my coat or is it better in shirt sleeves?" asked a smiling Dr Y. Venugopal Reddy, before settling down in the spacious brown sofa in his office, sans the coat. He was the same as of yore when as deputy governor he took time out to elaborate policy nuances.

Following are the excerpts:

You have talked of `Systemically Important Financial Intermediaries (SIFIs)' being monitored by RBI, SEBI and IRDA. Could you elaborate?

In India, about 12-15 banking companies account for 70-80 per cent of the whole financial system across businesses. Many banks today have merchant banking and insurance subsidiaries and are on the verge of becoming conglomerates. We should have a separate system to monitor and regulate these bodies as in the West.

The RBI-SEBI Technical Committee is in the process of preparing the list of SIFIs that need to be monitored. SIFIs will include not just banking companies extending into four or five areas i.e., conglomerates, but also other entities that are big enough to become systemically important by engaging in just one business such as NBFCs.

We have started some technical work for common, consolidated, conglomerate reporting. Reporting of intra group transactions will have to take place on a daily basis, if needed. Otherwise, the bank will report to the Reserve Bank of India and the insurance arm will be answerable to the Insurance Regulatory Development Authority.

But aren't banks already having consolidated balance sheets?

Yes, they have. But the new system will look not only at balance sheets at the end of a financial year. The regulators will look at intra-group transactions at any point in time and will include off-balance sheet items. By monitoring of SIFIs we will be operationalising regulatory co-ordination in respect of entities large enough to make a difference to the system.

Do you think there is interest rate arbitrage between domestic and international rates as of today?

In the debt-creating flows, there is of course legal arbitrage, by way of which companies borrow abroad in a lower interest rate currency like the dollar. This includes the external commercial borrowing route and short-term exporters credit. The reporting system to monitor the amounts involved is in place and is being strengthened.

The NRI money invested in NRE and FCNR (B) deposits is also being carefully monitored. We do not want to take a `stop and go' approach or a quantitative approach; we would rather moderate the price.

Is it now mandatory for corporates to hedge their foreign currency loans above $10 million?

The reference to hedging of foreign currency loans in the monetary policy is only to invite the attention of banks to the analytics and is not mandatory. Bank boards will have to take a policy view as to how unhedged exposures will impact their asset quality. Our intention is not to do micro management. All that we are saying is that banks have to be careful of big exposures to corporates.

Earlier we had been urging banks to ensure this, now we have illustratively pointed out the method of how they can go about it. If they take a risk, even after we have alerted them, then it is an informed risk.

Have domestic interest rates bottomed out?

It is very difficult to say at this point. We are watching the global economic scenario. To the extent that India is a little more linked to the global economies a little more than before, but not yet fully integrated, the weight that is attached to the global factors will be more than in the past.

RBI might be running short of securities to sterilise dollar inflows. What are the available options by which it can keep a check on the flows?

There is the traditional method of sterilisation, which is based on OMOs using G-secs with RBI. The amount of those securities with RBI has decreased. So if capital flows continue to be buoyant and if liquidity management continues to be required, other methods would be needed to sterilise the flows. There are a variety of ways. In some cases, we might need an amendment to the RBI Act. If some other route is chosen, an amendment might not be needed.

The recent lending restrictions imposed on offshore banking units have led to some unhappiness among banks as they feel that the concept of OBU almost becomes redundant.

When caps were imposed on the interest rates on NRI deposits, some banks started offering higher rates on their FCNR (B) deposits. In some cases they were offering 2.5 per cent over Libor, while as per existing regulation interest rates on FCNR deposits are capped at 25 basis points below Libor. Further, OBU deposits are not covered by deposit insurance. Banks have also not been upfront with their customers about whether the deposits they are collecting are for the bank in India or for their OBU. From an Indian point of view, the moment an OBU wants to operate within the domestic tariff area, it is like an external agency coming in and is subject to extant capital controls.

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