While continuing to pause repo rates in its monetary policy review, RBI raised the GDP outlook for FY24 to 7 per cent and retained the inflation projections at 5.4 per cent. The policy seeks to ensure that inflation progressively aligns with the target while supporting growth.

The RBI has also identified the period 2020-23 as one of ‘Great Volatility’, indicating that inadequate credit risk management could pose formidable risks. The policy review has hinted that financial intermediaries should focus on improved risk management systems to meet heightened risks.

In this context, it will be pertinent to recall the saga of 2011-15 when bank credit expanded fast. It is then that the term ‘irrational exuberance’ entered the lexicon of bank lending. Some institutions adopted the loan restructuring strategy to ‘extend and pretend’. It led to RBI imposing an Asset Quality Review (AQR) in September 2015. As a result, the gross non-performing assets (GNPAs) of banks increased steeply to 11.5 per cent.

Lingering risks

The risks experienced during 2011-16 when seen with the present bias in credit expansion by some financial intermediaries towards risky loans, affirms that the RBI is right in putting curbs on such trends. In view of the recent increase in exposure to credit card receivables, NBFCs, unsecured loans, and EMI-based consumer loans, RBI had to pitch in by increasing risk weights.

The proposed regulatory framework for connected lending, web-aggregation of loan products, and fintech repository will go a long way in strengthening risk management architecture.

Liquidity Management

System liquidity has been oscillating between deficit and surplus since the October policy but RBI’s timely interventions and increase in government spending eased pressure on liquidity. Though RBI was not required to use open-market operations (OMO) sales, it used VRRR and VRR auctions to manage the liquidity deftly.

However, at times, banks have simultaneously used the Standing Deposit Facility (SDF) and MSF facility to draw liquidity to meet their needs. RBI has allowed the reversal of liquidity facilities under both SDF and MSF even during weekends and holidays with effect from December 30, 2023.

This is expected to improve the availability of liquidity and ease weighted average call rates. Enhancing UPI transaction limits for specified categories is a logical step to boost digitalisation further. RBI must be lauded for its transparency and clarity in communication with stakeholders.

The writer is an Adjunct Professor, Institute of Insurance and Risk Management – IIRM, Hyderabad. Views are personal

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