RBI open to examining proposals for 'bad banks', will issue regulatory guidelines, says Shaktikanta Das

Chennai: RBI Governor Shaktikanta Das on Saturday said the financial stability is a public good, and its resilience and robustness need to be preserved and nurtured by all stakeholders.

The central bank has directed its policy efforts to put in place a state-of-the-art national payments infrastructure, ensuring a safe, secure, efficient and cost-effective robust payments ecosystem, he further said.

He was making those comments while delivering the 39th Nani Palkhivala memorial lecture through a virtual platform on Saturday.

The Reserve Bank of India (RBI), Das said, is positioning itself to provide an enabling environment where regulated entities are catalysed to exploit these new avenues while maintaining and preserving financial stability.

The governor said the central bank was open to look at any proposal for setting up a bad bank and would examine it before issuing any regulatory guidelines.

"Bad banks have been under discussion for a very long time. And I think you know we have in RBI provided regulatory guidelines for asset reconstruction companies. We are open to look at any proposal for setting up a bad bank," he said during a question and answer session.

Das said, "We are open and from a regulatory point of view, we are open in the sense that, if any proposal comes, we are open to examine it and give it regularly and issue guidelines. But then it is for the government and other private sector players to really plan for it."

"As far as Reserve Bank is concerned, we try to keep our regulatory framework in sync with the requirements of the times, if there is a proposal, mark my words, if there is a proposal for setting up of a bad bank, RBI will examine and take a view on that," he said.

In December 2020, Economic Affairs Secretary Tarun Bajaj had said the government was exploring all options, including setting up of a bad bank, to improve the health of the country's banking sector.

The governor said the country's financial system was facing both challenging times and also new opportunities as India's economy returns to its full vitality.

"New vistas of financial intermediation leveraging on technology and new business models will emerge," he said.

With the exponential growth of digitisation and online commerce, Das said, the central bank directed its policy efforts to put in place a state-of-the-art national payments infrastructure ensuring a safe, secure, and robust payments ecosystem.

"Financial stability is a public good and its resilience and robustness needs to be preserved and nurtured by all stakeholders...," he said.

To a query from a participant whether the RBI was having any mechanism to nurture the development of bond markets, he said, "We are in continuous dialogue with market participants, a lot of discussion (has been taking place) between RBI and SEBI.

"Let me say that so far as the government bond market is concerned, India is one of the most liquid markets in terms of entry norms and also in the ease of exit. But, in the private securities bond market, many more measures need to be taken, we are in discussion with SEBI."

To a query from a participant seeking some sort of solution to allow smaller NBFCs access more capital from banks, the governor said "for the scale-based regulations for NBFCs, the discussion paper is almost ready and it will come out in next few days".

The scale based regulatory guidelines focus is to nurture the sector to ensure that big NBFCs and smaller NBFCs have sufficient flexibility to operate and grow at the same time, he said.

"So far as the smaller NBFCs are concerned, I think from our experience, whether a larger NBFC or smaller NBFC, ultimately what differentiates is the quality of governance. During the pandemic period, the bank's credit to the NBFC sector remained steady. I think the emphasis should be more on the quality of governance and equally important is the business model," Das said.

To a query from another participant on the setting up of a 'nodal regulator' across sectors, Das said, "You should keep in mind that the financial sector has become more complex and highly interconnected. So to deal with the issue of interconnectedness and complexity..we have the mechanism of financial stability and all the regulators meet up regularly and discuss various inter-regulatory issues."

The focus should be on maintaining "good communication" among various regulators, he said.

The concept of having a 'single' regulator may also have its own downsize as it would become "huge" and may "lose sight of various segments", he said.

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