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 BT BEST BANKS 2001:
INTERVIEW
WITH BIMAL JALAN"Ensure Safety Of Deposits" Soon after presenting the monetary policy, RBI Governor Bimal Jalan met BT's Roshni Jayakar to discuss a range of issues from the industrial slowdown to the role of the regulator.
A. RBI is making sure that there is confidence in the banking system over availability of liquidity at reasonable rates. Credit for investment, for working capital, for increasing production should be available. Beyond that the monetary authority by itself cannot do much. The policy has announced a preference for softening of interest rates. But it also mentions that banks should be prepared for a reversal. What are your fears?
We expect the inflationary outlook to be positive and we expect industrial growth. But supposing the whole scenario had to change then the area of freedom will become less. As of now, I don't expect any adverse developments. Is the central bank moving towards more of micro-regulation? For instance, exposure of banks to stock markets... It's exactly the opposite. In all areas, you would find there is greater freedom and deregulation. There is a problem in one area-exposure to stock markets-but even in that particular area, RBI will have not micro-regulations but prudential ones to improve disclosures and transparency in order to prevent a nexus of the kind that has emerged between stock broking entities and one or two banks. The policy has come down heavily on cooperative banks post-scam. But it looks like we are throwing the baby out with the bath water... RBI's view is that urban cooperative banks are an important part of the banking sector. They are in semi-urban areas and play an important role. It is in the interest of the cooperative sector and its future growth, that there be complete public confidence in the safety of deposits. All the measures that RBI has announced are directed towards that objective. Further all the measures are prospective-that is they come into effect in future. So it doesn't affect the present except where there is unauthorised activity like advances to stock brokers which are not permitted in the cooperative system. For the future, they, especially the scheduled cooperative banks, have to move to move to a stronger framework. But would it not be a repeat of what happened with Non-Banking Finance Companies. We had one CRB (defaults by C.R. Bhansali and his companies) and the RBI came down so hard, all other NBFCs were virtually killed... I don't think NBFCs have been killed. In any system, when a problem comes up then you have to take some measures to strengthen the system. This is happening world over. Why is Basle committee reformulating new capital adequacy norms? Because it found that East Asia had a big problem. Why is Japan formulating its banking norms? Because it found banks were overexposed in certain sectors. So, I would look at it in a much more positive sense. And it is absolutely important to recognise that future growth of the banking system depends on the depositors' absolute confidence. So anything that we do in NBFC, cooperatives, or commercial banks to ensure safety of deposits is in the interest of that cooperative, that bank or that NBFC. The policy has advocated separate apex supervisory body for cooperative banks? At a time when everyone else is moving towards a super-regulator why are we setting up one more regulatory authority? There are two issues. One is the separation of inspection of certain entities from the monetary authority. The second is whether all segments of the financial market or anybody dealing with money, should be regulated by the same supervisor. The international experience is diverse. In the US there are multiple supervisors, Britain has moved to a single supervisor. Germany has announced its intention to do the same, but as of now they have multiple supervisors. So separation of one supervisory function from monetary authority doesn't run counter to the move towards having a super-regulator. It should be considered desirable in future. Do you see scope for a single regulator in India? Not at the moment because our markets are not as integrated as would be the case in much more developed and deeper financial markets Traditionally banks have been lending to the manufacturing sector. Are bankers competent enough to lend to the services sectors? Banks are already there. So far the concept was physical commodities; now banks have to develop norms for (the) services sector. They have been given guidelines for the software sector, for example, and I do not see too much of a problem in developing appropriate products for the services sector. Do we need more banks? You should never prevent entry in any market. This is the principle of competition. So periodically we should let new participants enter the market, but they have to be strong. In the new guidelines you would see that the capital requirements are substantially higher, that management has to be sound, and that they have to conform to all prudential norms. We have set up a three-member high level committee to go into much greater depth into the applications received and select two or three which are the best. If they find there are none, then none will come. You have suggested that RBI move out of debt management. So, what role do you see RBI playing in the future? Today, for historical reasons, the RBI has a large number of functions which are not carried out by the central bank. Ideally, a central bank should be the monetary authority dealing with issues like prudential norms and banking norms. In India, banks and financial institutions may remain under the supervision of the RBI because of the two-way relationship between monetary policy formulation and the feedback that you receive from these segments. Then there is RBI's international role in exchange rate management and its role in techno- logy for the financial sector and, of course, currency management. That's a large ambit. Rank 2001: 1-27
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Q. It is evident that the RBI is worried
about industrial slowdown. How is it addressing this issue?
