Lower credit offtake by firms, a sign of balance sheet clean-up: Shaktikanta Das

Surabhi/K Ram Kumar Mumbai | Updated on December 29, 2019

“Every decision taken at the central bank is attributed to the Governor and the buck stops with him,” said Shaktikanta Das, Governor, Reserve Bank of India, who recently completed the first year of his three-year term.

In an interaction with BusinessLine, Das said that with banks linking (retail and micro, small and medium enterprise) loans to an external benchmark, the transmission of the repo rate cuts into the credit market will happen faster.

The Governor observed that corporate’s lacklustre appetite for credit could perhaps be due to balance-sheet clean-up, deleveraging and pre-payment of loans. He added that some green shoots (of growth recovery) were visible. Excerpts:

How do you see the transition from being in the government to being in the RBI?

In between, there was a period when I was in my retirement and then I had joined the Finance Commission and the G-20 as the Sherpa. I think the main difference is that in the government you are a part of the system. You contribute to the decision-making process and decisions are attributed to the government and not the Secretary as there is a government system with the Minister, the Cabinet.

But in RBI, the buck stops with you, at your doorstep. There are many things in RBI which get decided depending on the delegation of powers, at various levels in the hierarchy. But every decision is attributed to the Governor whether you have taken the decision or not. The personal accountability is very high so far as the Governor is concerned compared to a Secretary in the Government of India.

Second, in the government you take decisions and the implementation process follows. On the other hand, at the RBI, many of your decisions relate to money markets and other markets. So, the markets react within minutes of a decision being taken. Here, one has to be always very alert on what is happening in the market.

But having said that, each responsibility or assignment — whether as a Secretary in the Finance Ministry or as the RBI Governor — involves its own challenges.

You have cut rates by 135 basis points to support the economy but there seem to be some hurdles in the transmission. So, what are you doing to smoothen the transmission process?

First, transmission does take time. Sometimes it takes two to four quarters. Here also the time factor is important. Second, as far as RBI action is concerned, we have taken steps to ensure that the system liquidity is in surplus. And that it is not just in surplus, it is hugely surplus by about ₹2.5 lakh crore or so per day. Third is the introduction of the external benchmarking (of lending rates) from October 1. We can expect faster transmission of the rates.

So, transmission is a process. Transmission in the money markets, as we stated post the MPC (monetary policy committee) meeting press conference, has been much faster and almost 100 per cent. The transmission in the credit market is 44 basis points (bps) on new loans; 49 bps in MCLR (marginal cost of funds based lending rate) on average. So credit market transmission is partial. Going forward, we do hope that there is better transmission...the external benchmark based lending rate will broadly ensure that whenever there is a cut in rate, it will ensure an immediate transmission.

So, are you satisfied with the transmission of repo rate cuts till now?

It is a process and we are constantly monitoring it. We are taking whatever steps possible at our end. The credit market is governed not just by the interest rates which the banks charge; it is also governed by the credit appetite of the individuals and corporates. At the moment, we find that the credit appetite of corporates is not as much as it was earlier but credit appetite at the individual retail level is quite steady and continues to be fairly strong.

Individual retail credit growth is about 17 per cent, and within that, housing credit growth is about 19 per cent. The credit market is governed by so many other factors. Then on the liability side, the deposit rates of banks also...the banks have taken some steps in that regard. Dealing with that aspect also involves its own complexities. Going forward, with external benchmark coming in, we do expect better transmission of rates.

Why is corporate appetite tepid?

I am not saying it is not there. I said it is not as much as it was earlier in a comparative sense. Perhaps, it is because the corporates are cleaning up their balance sheets as quite a number of them are deleveraging. The pre-payment level of bank loans by many corporates has gone up. So, they are pre-paying their bank loans, which is reflective of the fact that they are deleveraging balance sheets. In the process, their balance sheets are getting cleaned up and perhaps are becoming stronger. So a strong balance sheet should hopefully in the coming years propel them to invest more.

RBI has revised its GDP forecast four times in FY2020 cumulatively by 220 bps to 5 per cent. Do you see a need for revisiting how the forecast is done?

This year has been a very unusual year. Internationally, almost every country has experienced downward revision in growth projections and there have been international uncertainties as well. The US-China trade tension has fluctuated almost on a weekly basis. Sometimes, statements are made that they are almost about to reach a trade deal, then after a few days a statement comes that they are far away. So that has remained quite volatile. Issues around Brexit have also remained fairly volatile this year. Crude prices by and large remained (stable), except the Saudi drone strike which added quite a bit of uncertainty.

But now, I think, quite a few things are falling into place. The US-China trade deal seems to be — part of it is — almost done. There are statements and follow-up actions in that direction. Regarding Brexit— the elections are over (in the UK) and a new government, which has come in, has said they will carry it forward. So it has reduced the uncertainty. The oil prices, beyond the Saudi drone strike created an uncertainty for about a month or so, has stabilised. So during the year, the uncertainties have been far too many. And it has oscillated in both the directions.

There have been uncertainties in the country as well...for example, the unseasonal rains in October and November which affected the vegetable production and caused a spike in vegetable prices.

Almost every analyst or institution which looks at Indian GDP number, when the year began, the picture was looking different. But during the course of the year...the incoming data has really fluctuated and changed throughout the year. So this year has been a very unusual year. We are looking at our internal models and NowCasting models and we are making an effort to see how we can further improve upon it.

But it is not a case that something did not come on our radar in the beginning and has now cropped up. The incoming data on our radar has fluctuated so much that naturally, the conclusion we have drawn also fluctuates.

When do you see growth coming back? Also what is your take on fiscal deficit?

There are some green shoots visible. But it is important that we wait and see whether these green shoots are getting sustained over a period of two quarters or so before we reach a conclusion. It would be premature to just see a green shoot and reach a conclusion. One has to see whether these green shoots are visible or not.

The final fiscal number will now come in the Budget. On the fiscal side, the government has announced that they will not go for any additional borrowing and they will stick to the fiscal deficit. But there is a GST (Goods and Service Tax) shortfall which has been getting reported and then there would be an impact because of the corporate tax reduction. It would appear that at the moment government is giving an extra push to disinvestment. I think the Budget will give greater clarity on fiscal deficit.

Just as commercial banks had an asset quality review in 2015, is there need for a similar exercise for NBFCs and UCBs?

We are monitoring the top 50 NBFCs, which represent roughly 75 per cent of the aggregate balance-sheet of all the NBFCs. So, we are doing close supervision. We are aware of the problems and our teams are working with the promoters and managements of those NBFCs to set right the vulnerabilities and deficiencies.

Where additional capital has to be brought in by them, we are telling them that they need to bring in additional capital. Where we find that they have to, sort of, be cautious with regard to further lending, we are advising caution. And unplanned expansion of the balance sheet also, wherever required, we are telling them that they need to exercise caution. It’s only where we see a vulnerability (the RBI is doing this). So, therefore, with the close supervision, we are addressing all the issues which should be of concern.

Reporting (regulatory) for NBFCs has increased. We have also brought in norms like the requirement of appointing a Chief Risk Officer and prescribed liquidity coverage ratio. And other regulatory measures are under consideration. But we will deal with those regulatory measures in a very calibrated manner so that whatever additional measures we take, it does not disrupt the process of revival of the NBFCs.

We want to ensure that the NBFC sector becomes stable. Post IL&FS, there were a lot of question marks about the stability of the NBFC sector and our first focus is to ensure that the NBFC sector is stable. Financial stability is our responsibility. And along with stability, of course, flow of credit to NBFC sector and from NBFC sector to end borrowers is important.

In the case of UCBs, we will come out with certain additional regulatory measures, shortly. We are now making them a part of our CRLIC (Central Repository of Information on Large Credits) system. We have prescribed a certain cyber-security framework which they must follow. Other regulatory guidelines relating to their single exposure will also follow.

Published on December 29, 2019

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