The Government of India has enacted the Right to Information Act, 2005 (http://www.persmin.nic.in) which has come into effect from October 12, 2005. The Right to Information under this Act is meant to give to the citizens of India access to information under control of public authorities to promote transparency and accountability in these organisations. The Act, under Sections 8 and 9, provides for certain categories of information to be exempt from disclosure. The Act also provides for appointment of a Chief Public Information Officer to deal with requests for information.

RBI’s Obligation under the Act

The Reserve Bank of India is a public authority as defined in the Right to Information Act, 2005. As such, the Reserve Bank of India is obliged to provide information to members of public.

Foreword

The term strategy originates from the Greek word “Strategos”, which means “General”. Just as a General lays out a plan to chart a path towards victory by optimising resources and strengths, Utkarsh is intended to be a living document that sets out the course that the Bank adopts to deliver excellence in its work..

Utkarsh 2.0 lays out the specific features of this journey in terms of values, mission, vision, and associated building blocks (milestones). It is crafted by and for each department in its pursuit of the Bank’s overarching goals. It builds upward from an ensemble of milestones and encompasses the timeframe 2023-25.

Against the backdrop of a challenging global and domestic environment, Utkarsh 2.0 commences from 2023, when India assumes the G-20 Presidency.

Like Utkarsh 2022, Utkarsh 2.0 sets out strategies and milestones under six visions which will guide the Bank along this roadmap to achieve its goals. We are guided in the endeavour by the light shone by the words of Mahatma Gandhi, means are more important than the end; it is only with the right means that the desired end will follow¹.

1.1 Introduction

I.1 Strategy plays a crucial role in shaping the future of an organisation. It aids in fulfilling the mission and vision, thereby leading to overall organisational development and progress. Central banks around the world have formulated medium-term strategy frameworks.

I.2 In the past, the Bank had Annual Action Plans under which the work to be taken up during a year was laid out and monitored for progress and completion. The exercise, however, did not provide a single point of reference so as to have a bird’s eye view of the functioning of the Bank. Moreover, an annual plan was perceived to be too short a period for pursuing strategic objectives.

I.3 Accordingly, it was decided to formulate a longer-term dynamic strategy framework that could capture and respond to the rapidly emerging features of the economic, social, and technological ecosystem. Utkarsh 2022, the medium-term strategy framework of the Bank, was approved by the Central Board of Directors and launched in July 2019. The implementation of Utkarsh 2022 was steered by a high-level Strategy Sub-Committee of the Bank’s Central Board of Directors.

Structure of Utkarsh 2.0

I.4 Utkarsh 2.0, the Strategy Framework being put in place for the period 2023-25, sets out the priorities, activities, and desired outcomes under each of the objectives of the Bank for the period between 2023 and 2025. The framework for Utkarsh 2.0 has been recast to make it sharper and to ensure that there are no overlapping terminologies. It is built on similar lines as Utkarsh 2022 and will carry forward the current agenda while proactively addressing future challenges. While simplifying the structure to avoid redundancy, the revised structure consists of three layers, viz., Visions, Strategies and Milestones which will assist in the focused monitoring (Chart II.1).

Mission, Core Purpose and Values

I.5 The Mission in Utkarsh is to promote:

• The economic and financial well-being of the people of India in terms of price and financial stability;
• Fair and universal access to financial services; and
• A robust, dynamic, and responsive financial intermediation infrastructure

I.6 The core purpose in Utkarsh is to foster monetary and financial stability keeping in mind the objective of growth and to ensure the development of an efficient and inclusive financial system. This reflects the Bank’s commitment to the nation to:

• foster confidence in the internal and external value of the Rupee and contribute to macro-economic stability;
• regulate markets and institutions under its ambit to ensure financial system stability and consumer protection;
• promote the integrity, efficiency, inclusiveness and competitiveness of the financial and payment systems;
• ensure efficient management of the currency as well as banking services to the Government and banks; and
• support balanced and equitable economic development of the country.

I.7 Through the values embodied in Utkarsh, the Bank commits itself to the following shared values that guide organisational decisions and employee actions (Table I.1):

Vision 1: Excellence in the Performance of its Functions

II.2 The objective of the Bank’s vision is to achieve excellence in executing its functions including formulation of monetary policy, regulating and supervising the financial system, managing foreign exchange, issuing currency and regulating and supervising payment and settlement systems. An abiding endeavour has been to strive for improvement and innovation in disposition of these functions because of which the Bank has evolved as a “full service central bank”⁵. The reputation of the Bank is critically dependent on the timely and excellent discharge of its functions.

II.3 Vision 1, therefore, is significant under the strategy framework. It has 24 strategies. The focus is not only to perform all the functions tasked to the Bank, but to perform them consistently well. The strategies under Vision 1 are given below (Table II.2).

Vision 2: Strengthened Trust of Citizens and Institutions in the Reserve Bank of India

II.4 An important pillar for effective delivery of the Bank’s functions is the trust of all stakeholders. The perception of citizens and other market participants that the Bank is capable of and is doing the right things at the right time and in the right manner is important for enhancing the reputation of the Bank as a public institution. It is in this context that continuous efforts are made to strengthen the trust of citizens and institutions in it by improving the transparency of functions, better and effective communication and reach, constant engagement with all relevant stakeholders, enhanced consumer awareness and efficient grievance redress mechanisms.

II.5 Towards this objective, the Bank proposes to ensure its presence in all the states; ensure that complaints against its regulated entities are heard and redressed in a time-bound manner; and the compliance culture among the regulated entities is improved through expeditious discharge of the enforcement function.

II.6 Dissemination of information to the public goes a long way in reinforcing trust and assuaging apprehensions. The Bank will have an informative, well-designed and constantly evolving website. Feedback will be obtained, and the impact of the Bank’s public awareness initiatives will be assessed. This Vision has 8 strategies. The strategies under Vision 2 are given below (Table II.3).

Vision 3: Enhanced Relevance and Significance in National and Global roles

II.7 The Bank has an important role to play in national and global fora such as the International Monetary Fund, the Bank for International Settlements, the Financial Stability Board, the G-20 and the like. Vision 3 sharpens and augments the Bank’s focus on international financial diplomacy and participation in formulation of global regulatory standards in a proactive manner. The Bank will also continue its initiatives in articulating its stance and views on major global economic and regulatory policy issues, highlighting India’s specific characteristics.

II.8 The Bank shall maintain strong engagement with the committees under the Bank for International Settlements and host associations in the context of the Basel process and payment system initiatives. It will broaden its economic analysis and research to include new themes. The Bank will engage with central banks in the innovation space to explore the practical implications of new technological trends. The Bank’s brand equity will be enhanced by internationalising Bank’s Payments Stack across all dimensions.

II.9 The strategies under Vision 3 are given below (Table II.4)

Vision 4: Transparent, Accountable and Ethics-Driven Internal Governance

II.10 Internal governance contains an organisation’s formal set of structures, communication lines, procedures and rules to ensure that its moral code is followed. It includes values, beliefs and practices that guide and inform the actions of all the employees in an organisation. The key pillars of sound internal governance are integrity, transparency, trust, accountability mechanism, ethical conduct and sound processes and practices. Sound internal governance has the potential of attracting the best talent and motivating existing employees to give their best.

II.11 Openness and accountability are increasingly recognised as fundamental qualities of good governance. The Bank shall continue to strive to achieve transparent, accountable and ethics driven internal governance by strengthening its strategy framework and business continuity management, upgrading internal control measures, assessing emerging risks and adopting international best practices of enterprise risk management.

II.12 Through this vision, the Bank documents its values, including its commitment to integrity, fairness, transparency, and ethical conduct. The Bank shall also undertake periodical evaluation of the policies and update them considering the feedback received and the evolving scenarios in which it must operate. Adherence to accountability mechanisms will be reviewed at regular intervals.

II.13 The strategies under Vision 4 are given below (Table II.5).

Vision 5: Best-in-class and Environment-friendly Digital and Physical Infrastructure

II.14 The physical and digital environment is essential for a financial system to function well and for an employee to perform his / her duties efficiently. From a financial sector perspective, it includes a robust infrastructure for markets to operate at ease and in a non-disruptive manner. From the employee perspective, it includes not only the office premises but also the IT setup, the residential arrangements and so on.

II.15 Integrating architectural excellence and aesthetic appeal with green ratings in the premises of the Bank, while ensuring the highest level of cleanliness and physical security and automating processes, achieving the integration of information, and ensuring dissemination through a robust Information Technology (IT) system will enable the Bank to move towards best-in-class and environment friendly digital as well as physical infrastructure.

II.16 The strategies under Vision 5 are given below (Table II.6).

Vision 6: Innovative, Dynamic and Skilled Human Resources

II.17 Human resources are the prime drivers of any organisation and they play the most important role in defining its success. The constantly changing environment in which the Bank operates, and the changing needs of the economy require the staff to be competent and equipped with cutting-edge skills. Skilled and dynamic human resources are the foundation and pillars which will enable the Bank to excel in performance of its role effectively.

II.18 The world of human resource management is changing in terms of demographic shifts, work from home culture in a volatile environment requiring constant innovation. The strategy framework strives to create an innovative, dynamic and skilled human resources; use technology and data analytics in promoting research-based decision making; build a proficient and facilitative employee interface for effective communication; positive workplace experience, and enhanced employee engagement; establish a listening oriented organisation culture to promote better employer-employee relationship; and capacity building through a robust online training mechanism focused on continuous learning.

II.19 The strategies under Vision 6 are given below (Table II.7).

“Tomorrow belongs only to the people who prepare for it today” ~ Malcolm X⁶.

Chapter III

Conclusion

III.1 As we embark upon the journey of realising Utkarsh 2.0 and thereby the Bank’s medium-term strategies and milestones, continuous evaluation and constant engagement with relevant stakeholders will be required. Utkarsh 2.0 leverages the learnings from the existing medium-term strategy framework but with a simplified structure and well-defined milestones. Utkarsh 2.0 enables the Bank to be in readiness not just to respond to the changing socio-economic environment, but also proactively anticipate and act.

III.2 The vision of excellence in the performance of its functions envisages strengthening the regulatory landscape for the well-being of the financial sector while the visions of strengthened trust of citizens in the Bank along with transparent, accountable and ethics-driven internal governance provide the wherewithal for sustaining excellence within the Bank.

III.3 Regional Offices’ perspectives are an integral part of the six visions. This is reflective of inclusiveness in the strategic approach of the Bank, incorporating a ‘feel’ of the states and a knowledge of regional realities in the collection of market intelligence, ensuring localised supervision, and providing last mile customer service. Regional offices provide meaningful inputs defining micro-aspects in the macro-strategic approach⁷.

III.4 India’s success story in digital payments is acknowledged globally. Steps towards creating a world class digital infrastructure and enabling global spread of the Bank’s payments stack is part of the vision to establish India as a leader in this domain.

III.5 With India’s G-20 presidency during the period of Utkarsh 2.0, it confers a unique opportunity to showcase our accomplishments in the realm of digital payments and strive towards broad basing of acceptance of the Indian Rupee in bilateral and multilateral trade. The current geopolitical scenario has created an opportunity where concomitant efforts from economic and financial sector towards realising our potential in international fora would augur well and thus it forms part of our strategy framework.

III.6 In this age of data, the Bank plays the dual role of data collection as well as information dissemination. With this comes the responsibility of reliability of data collected to create meaningful and accurate information. Therefore, adoption of Artificial Intelligence (AI) and Machine Learning (ML) driven tools for data analysis and information creation will be an integral part of Utkarsh 2.0.

III.7 The achievement of the milestones under the Utkarsh 2.0 will strengthen the regulatory landscape for the well-being of the financial sector and enhance the trust of citizens in the Bank. The strategy framework will also make the Bank a listening oriented, transparent organisation equipped with best-in-class and environment friendly digital and physical infrastructure. This will also contribute to better employer-employee relationship. Robust internal governance, effective risk assurance, fostering of risk culture will be the cornerstones of the Bank’s tryst with excellence. As such, Utkarsh 2.0 will act as the pole star helping the Bank to constantly evolve in sync with the ever-changing world. In the words of Mahatma Gandhi, “You must be the change you wish to see in the world⁸.

The Government of India has enacted the Right to Information Act, 2005 (http://www.persmin.nic.in) which has come into effect from October 12, 2005. The Right to Information under this Act is meant to give to the citizens of India access to information under control of public authorities to promote transparency and accountability in these organisations. The Act, under Sections 8 and 9, provides for certain categories of information to be exempt from disclosure. The Act also provides for appointment of a Chief Public Information Officer to deal with requests for information.

RBI’s Obligation under the Act

The Reserve Bank of India is a public authority as defined in the Right to Information Act, 2005. As such, the Reserve Bank of India is obliged to provide information to members of public.

Foreword

The term strategy originates from the Greek word “Strategos”, which means “General”. Just as a General lays out a plan to chart a path towards victory by optimising resources and strengths, Utkarsh is intended to be a living document that sets out the course that the Bank adopts to deliver excellence in its work..

Utkarsh 2.0 lays out the specific features of this journey in terms of values, mission, vision, and associated building blocks (milestones). It is crafted by and for each department in its pursuit of the Bank’s overarching goals. It builds upward from an ensemble of milestones and encompasses the timeframe 2023-25.

Against the backdrop of a challenging global and domestic environment, Utkarsh 2.0 commences from 2023, when India assumes the G-20 Presidency.

Like Utkarsh 2022, Utkarsh 2.0 sets out strategies and milestones under six visions which will guide the Bank along this roadmap to achieve its goals. We are guided in the endeavour by the light shone by the words of Mahatma Gandhi, means are more important than the end; it is only with the right means that the desired end will follow¹.

1.1 Introduction

I.1 Strategy plays a crucial role in shaping the future of an organisation. It aids in fulfilling the mission and vision, thereby leading to overall organisational development and progress. Central banks around the world have formulated medium-term strategy frameworks.

I.2 In the past, the Bank had Annual Action Plans under which the work to be taken up during a year was laid out and monitored for progress and completion. The exercise, however, did not provide a single point of reference so as to have a bird’s eye view of the functioning of the Bank. Moreover, an annual plan was perceived to be too short a period for pursuing strategic objectives.

I.3 Accordingly, it was decided to formulate a longer-term dynamic strategy framework that could capture and respond to the rapidly emerging features of the economic, social, and technological ecosystem. Utkarsh 2022, the medium-term strategy framework of the Bank, was approved by the Central Board of Directors and launched in July 2019. The implementation of Utkarsh 2022 was steered by a high-level Strategy Sub-Committee of the Bank’s Central Board of Directors.

Structure of Utkarsh 2.0

I.4 Utkarsh 2.0, the Strategy Framework being put in place for the period 2023-25, sets out the priorities, activities, and desired outcomes under each of the objectives of the Bank for the period between 2023 and 2025. The framework for Utkarsh 2.0 has been recast to make it sharper and to ensure that there are no overlapping terminologies. It is built on similar lines as Utkarsh 2022 and will carry forward the current agenda while proactively addressing future challenges. While simplifying the structure to avoid redundancy, the revised structure consists of three layers, viz., Visions, Strategies and Milestones which will assist in the focused monitoring (Chart II.1).

Mission, Core Purpose and Values

I.5 The Mission in Utkarsh is to promote:

• The economic and financial well-being of the people of India in terms of price and financial stability;
• Fair and universal access to financial services; and
• A robust, dynamic, and responsive financial intermediation infrastructure

I.6 The core purpose in Utkarsh is to foster monetary and financial stability keeping in mind the objective of growth and to ensure the development of an efficient and inclusive financial system. This reflects the Bank’s commitment to the nation to:

• foster confidence in the internal and external value of the Rupee and contribute to macro-economic stability;
• regulate markets and institutions under its ambit to ensure financial system stability and consumer protection;
• promote the integrity, efficiency, inclusiveness and competitiveness of the financial and payment systems;
• ensure efficient management of the currency as well as banking services to the Government and banks; and
• support balanced and equitable economic development of the country.

I.7 Through the values embodied in Utkarsh, the Bank commits itself to the following shared values that guide organisational decisions and employee actions (Table I.1):

Vision 1: Excellence in the Performance of its Functions

II.2 The objective of the Bank’s vision is to achieve excellence in executing its functions including formulation of monetary policy, regulating and supervising the financial system, managing foreign exchange, issuing currency and regulating and supervising payment and settlement systems. An abiding endeavour has been to strive for improvement and innovation in disposition of these functions because of which the Bank has evolved as a “full service central bank”⁵. The reputation of the Bank is critically dependent on the timely and excellent discharge of its functions.

II.3 Vision 1, therefore, is significant under the strategy framework. It has 24 strategies. The focus is not only to perform all the functions tasked to the Bank, but to perform them consistently well. The strategies under Vision 1 are given below (Table II.2).

Vision 2: Strengthened Trust of Citizens and Institutions in the Reserve Bank of India

II.4 An important pillar for effective delivery of the Bank’s functions is the trust of all stakeholders. The perception of citizens and other market participants that the Bank is capable of and is doing the right things at the right time and in the right manner is important for enhancing the reputation of the Bank as a public institution. It is in this context that continuous efforts are made to strengthen the trust of citizens and institutions in it by improving the transparency of functions, better and effective communication and reach, constant engagement with all relevant stakeholders, enhanced consumer awareness and efficient grievance redress mechanisms.

II.5 Towards this objective, the Bank proposes to ensure its presence in all the states; ensure that complaints against its regulated entities are heard and redressed in a time-bound manner; and the compliance culture among the regulated entities is improved through expeditious discharge of the enforcement function.

II.6 Dissemination of information to the public goes a long way in reinforcing trust and assuaging apprehensions. The Bank will have an informative, well-designed and constantly evolving website. Feedback will be obtained, and the impact of the Bank’s public awareness initiatives will be assessed. This Vision has 8 strategies. The strategies under Vision 2 are given below (Table II.3).

Vision 3: Enhanced Relevance and Significance in National and Global roles

II.7 The Bank has an important role to play in national and global fora such as the International Monetary Fund, the Bank for International Settlements, the Financial Stability Board, the G-20 and the like. Vision 3 sharpens and augments the Bank’s focus on international financial diplomacy and participation in formulation of global regulatory standards in a proactive manner. The Bank will also continue its initiatives in articulating its stance and views on major global economic and regulatory policy issues, highlighting India’s specific characteristics.

II.8 The Bank shall maintain strong engagement with the committees under the Bank for International Settlements and host associations in the context of the Basel process and payment system initiatives. It will broaden its economic analysis and research to include new themes. The Bank will engage with central banks in the innovation space to explore the practical implications of new technological trends. The Bank’s brand equity will be enhanced by internationalising Bank’s Payments Stack across all dimensions.

II.9 The strategies under Vision 3 are given below (Table II.4)

Vision 4: Transparent, Accountable and Ethics-Driven Internal Governance

II.10 Internal governance contains an organisation’s formal set of structures, communication lines, procedures and rules to ensure that its moral code is followed. It includes values, beliefs and practices that guide and inform the actions of all the employees in an organisation. The key pillars of sound internal governance are integrity, transparency, trust, accountability mechanism, ethical conduct and sound processes and practices. Sound internal governance has the potential of attracting the best talent and motivating existing employees to give their best.

II.11 Openness and accountability are increasingly recognised as fundamental qualities of good governance. The Bank shall continue to strive to achieve transparent, accountable and ethics driven internal governance by strengthening its strategy framework and business continuity management, upgrading internal control measures, assessing emerging risks and adopting international best practices of enterprise risk management.

II.12 Through this vision, the Bank documents its values, including its commitment to integrity, fairness, transparency, and ethical conduct. The Bank shall also undertake periodical evaluation of the policies and update them considering the feedback received and the evolving scenarios in which it must operate. Adherence to accountability mechanisms will be reviewed at regular intervals.

II.13 The strategies under Vision 4 are given below (Table II.5).

Vision 5: Best-in-class and Environment-friendly Digital and Physical Infrastructure

II.14 The physical and digital environment is essential for a financial system to function well and for an employee to perform his / her duties efficiently. From a financial sector perspective, it includes a robust infrastructure for markets to operate at ease and in a non-disruptive manner. From the employee perspective, it includes not only the office premises but also the IT setup, the residential arrangements and so on.

II.15 Integrating architectural excellence and aesthetic appeal with green ratings in the premises of the Bank, while ensuring the highest level of cleanliness and physical security and automating processes, achieving the integration of information, and ensuring dissemination through a robust Information Technology (IT) system will enable the Bank to move towards best-in-class and environment friendly digital as well as physical infrastructure.

II.16 The strategies under Vision 5 are given below (Table II.6).

Vision 6: Innovative, Dynamic and Skilled Human Resources

II.17 Human resources are the prime drivers of any organisation and they play the most important role in defining its success. The constantly changing environment in which the Bank operates, and the changing needs of the economy require the staff to be competent and equipped with cutting-edge skills. Skilled and dynamic human resources are the foundation and pillars which will enable the Bank to excel in performance of its role effectively.

II.18 The world of human resource management is changing in terms of demographic shifts, work from home culture in a volatile environment requiring constant innovation. The strategy framework strives to create an innovative, dynamic and skilled human resources; use technology and data analytics in promoting research-based decision making; build a proficient and facilitative employee interface for effective communication; positive workplace experience, and enhanced employee engagement; establish a listening oriented organisation culture to promote better employer-employee relationship; and capacity building through a robust online training mechanism focused on continuous learning.

II.19 The strategies under Vision 6 are given below (Table II.7).

“Tomorrow belongs only to the people who prepare for it today” ~ Malcolm X⁶.

Chapter III

Conclusion

III.1 As we embark upon the journey of realising Utkarsh 2.0 and thereby the Bank’s medium-term strategies and milestones, continuous evaluation and constant engagement with relevant stakeholders will be required. Utkarsh 2.0 leverages the learnings from the existing medium-term strategy framework but with a simplified structure and well-defined milestones. Utkarsh 2.0 enables the Bank to be in readiness not just to respond to the changing socio-economic environment, but also proactively anticipate and act.

III.2 The vision of excellence in the performance of its functions envisages strengthening the regulatory landscape for the well-being of the financial sector while the visions of strengthened trust of citizens in the Bank along with transparent, accountable and ethics-driven internal governance provide the wherewithal for sustaining excellence within the Bank.

III.3 Regional Offices’ perspectives are an integral part of the six visions. This is reflective of inclusiveness in the strategic approach of the Bank, incorporating a ‘feel’ of the states and a knowledge of regional realities in the collection of market intelligence, ensuring localised supervision, and providing last mile customer service. Regional offices provide meaningful inputs defining micro-aspects in the macro-strategic approach⁷.

III.4 India’s success story in digital payments is acknowledged globally. Steps towards creating a world class digital infrastructure and enabling global spread of the Bank’s payments stack is part of the vision to establish India as a leader in this domain.

III.5 With India’s G-20 presidency during the period of Utkarsh 2.0, it confers a unique opportunity to showcase our accomplishments in the realm of digital payments and strive towards broad basing of acceptance of the Indian Rupee in bilateral and multilateral trade. The current geopolitical scenario has created an opportunity where concomitant efforts from economic and financial sector towards realising our potential in international fora would augur well and thus it forms part of our strategy framework.

III.6 In this age of data, the Bank plays the dual role of data collection as well as information dissemination. With this comes the responsibility of reliability of data collected to create meaningful and accurate information. Therefore, adoption of Artificial Intelligence (AI) and Machine Learning (ML) driven tools for data analysis and information creation will be an integral part of Utkarsh 2.0.

III.7 The achievement of the milestones under the Utkarsh 2.0 will strengthen the regulatory landscape for the well-being of the financial sector and enhance the trust of citizens in the Bank. The strategy framework will also make the Bank a listening oriented, transparent organisation equipped with best-in-class and environment friendly digital and physical infrastructure. This will also contribute to better employer-employee relationship. Robust internal governance, effective risk assurance, fostering of risk culture will be the cornerstones of the Bank’s tryst with excellence. As such, Utkarsh 2.0 will act as the pole star helping the Bank to constantly evolve in sync with the ever-changing world. In the words of Mahatma Gandhi, “You must be the change you wish to see in the world⁸.

In recent times, especially since the outbreak of the COVID-19 pandemic, central banks – who are at the core of monetary and financial systems – have been called to do “heavy lifting” well beyond their traditional mandate. Central banks have navigated through unchartered waters during the three black swan events – the pandemic, the war in Ukraine and the unprecedented scale and pace of global monetary policy normalisation – all in the span of three years. More recently, central banks had to quickly change gears from providing stimulus to pandemic ravaged economies to battling inflation with all ammunition at their disposal. Even as the battle against inflation was ongoing, the banking turmoil in certain advanced economies (AEs) posed the awkward trade-off between financial stability and price stability. This extraordinary period of global turbulence has indeed been extremely challenging for central banks and central banking.

2. In my address today, I propose to highlight the Reserve Bank of India’s response to the multiple challenges of COVID-19, surge in inflation, growth slowdown and threats to financial stability. I also propose to enumerate the lessons learnt which may become a part of central bank operating procedure for such events in the future.

COVID-19 Response

3. The COVID-19 pandemic scarred the global economy, causing unimaginable loss of life and livelihood. In India, our response amidst the imposition of nation-wide lockdown and social distancing was prompt and decisive. We were perhaps amongst the first few central banks to have set up a special quarantine facility with about 200 officers, staff and service providers, engaged in critical activities to ensure business continuity in banking and financial market operations and payment systems. Our monetary policy committee (MPC) reacted swiftly by reducing the policy repo rate sizeably by 115 bps in a span of two months (March-May 2020). Unlike advanced economy (AE) central banks which eased rates close to the zero-lower bound, we did not reduce the policy repo rate below our inflation target of 4 per cent. Together with other actions in the liquidity front, this helped us in supporting growth without fuelling inflationary pressures. This also helped in undertaking a faster reversal of stance later, without being market disruptive.

4. Along with the rate cuts, we infused significant quantum of liquidity through both conventional and unconventional measures to stimulate the economy, restore confidence and revive market activity, while being mindful of the need to ensure that our liquidity augmenting measures do not engender future fragilities. Our liquidity measures were unique in several ways: first, liquidity was provided only through the Reserve Bank’s counterparties (banks) for on-lending to stressed entities/sectors; second, asset purchase programme was for a limited period of six months and much smaller in size than advanced economies, and was confined to government securities only; third, collateral standards were not diluted while offering lending facilities; and fourth, loan resolution frameworks for COVID-19 related stressed assets were not open ended but subject to achievement of certain financial and operational parameters. Moreover, most of our liquidity injection measures had pre-announced sunset clauses, which helped in an orderly unwinding of liquidity on their respective terminal dates without de-anchoring market expectations. Overall, liquidity enhancing measures worth US$ 227 billion (8.7 per cent of GDP) were announced, of which funds availed were US$ 157.5 billion (6.0 per cent of GDP).

5. The liquidity infusion measures were mostly concentrated in 2020 but continued in 2021 in view of fresh waves of the pandemic and the fragile nature of economic recovery. Nevertheless, surplus liquidity was gradually migrated from the short end to the longer horizon during 2021 through variable rate reverse repo (VRRR) auctions of longer tenors, which lifted short-term rates from ultra-low levels, thereby obviating financial stability challenges. This was done by sensitising the market well in advance through effective communication. Further, recognising that the yield curve is a public good, the benefits of which accrue to all, we undertook outright asset purchases and operation twist¹ – which were generally liquidity neutral – to modulate long term G-sec yields. This, in turn, lowered rates on all instruments benchmarked to prices of the G-sec yield curve. The resultant congenial conditions allowed corporates to mobilise large resources and repay high-cost debt from banks. Such deleveraging by corporates reduced their balance sheet vulnerabilities and facilitated credit offtake later in 2022-23. The benign liquidity conditions also enabled the banks to mobilise additional capital and strengthen their balance sheets to withstand future stress, if any.

Inflation Challenges

6. At the height of the pandemic during 2020 and 2021, the MPC prioritised growth over inflation, given the frail economic conditions and notwithstanding intermittent inflationary pressures from supply shocks. For instance, supply-side pressures had nudged inflation above the upper tolerance band of 6 per cent in October 2020 and there were market concerns over the continuation of the accommodative monetary policy stance. Under these circumstances, we provided both state- and time-based forward guidance on continuing “with the accommodative stance of monetary policy as long as necessary – at least during the current financial year and into the next year ...” as output remained well below its pre-pandemic level. In the second half of 2020-21, inflation eased in line with our assessment as supply side pressures abated. The time-based element of the guidance helped to anchor market expectations and moderate undue expectations building up at that time of a possible reversal of the monetary policy stance.

7. In early 2022, inflation was expected to moderate significantly with a projected average rate of 4.5 per cent for 2022-23, based on an anticipated normalisation of supply chains, the gradual ebbing of COVID-19 infections and a normal monsoon. Such expectations, however, were belied by the outbreak of hostilities in Ukraine since end-February 2022. Initially, the shocks came from food and fuel prices, which were mainly global in origin, but local factors from adverse weather events also played an important role in increasing food inflation. The shocks to inflation got increasingly generalised over the ensuing months. Moreover, strengthening domestic recovery and rising demand enabled pass-through of pent-up input costs to retail goods and services. This imparted stickiness to underlying core inflation and kept headline inflation at elevated levels.

8. Under these circumstances, the MPC quickly changed gears by prioritising inflation over growth and also changed its stance from being accommodative to withdrawal of accommodation. The MPC acted proactively by holding an off-cycle meeting in May 2022 and raised the policy rate by 40 basis points. This was followed by rate hikes, albeit of varying sizes, in each of the five subsequent meetings till February 2023. In all, we have raised the policy repo rate by 250 bps cumulatively between May 2022 and February 2023. Thus, we acted in a timely manner and have calibrated the quantum of rate hike with the changing inflation outlook. In recent months, there are signs of some softening in inflation, with headline inflation easing to 4.25 per cent in May 2023 from the peak of 7.8 per cent in April 2022.

9. The cumulative impact of our monetary policy actions over the last one year is still unfolding and yet to materialise fully. While our inflation projection for the current financial year 2023-24 is lower at 5.1 per cent, it would still be well above the target. As per our current assessment, the disinflation process is likely to be slow and protracted with convergence to the inflation target of 4 per cent being achieved over the medium-term. Based on this realisation and with a view to assess the impact of past actions, we decided on a pause in the April and June 2023 meetings, but clarified unequivocally that this not a pivot – not a definitive change in policy direction. Recognising that explicit guidance in a rate tightening cycle is inherently fraught with risks, the MPC has also eschewed from providing any future guidance on the timing and level of the terminal rate.

Growth concerns

10. In India, with the formal adoption of flexible inflation targeting (FIT) in 2016, the Reserve Bank of India is entrusted with the responsibility of conducting monetary policy with the primary objective of “maintaining price stability while keeping in mind the objective of growth”. Given our population² and large addition to the work force every year because of the “demographic dividend”,³ we cannot be oblivious to growth concerns. Hence, we prioritised growth during the pandemic years even as inflation remained above the target but within the tolerance band.

11. The Indian economy displayed exemplary resilience post-pandemic and rebounded strongly from a contraction of 5.8 per cent in 2020-21 to a growth of 9.1 per cent in 2021-22 and 7.2 per cent in 2022-23. Proactive and coordinated response of fiscal and monetary policies nurtured a quick recovery, while various structural reforms related to banking, digitalisation, taxation, manufacturing and labour, implemented in the last few years, laid the foundation for strong and sustainable growth over the medium and long term. The government’s continued thrust on capital expenditure is creating additional capacity and nurturing the much-awaited revival in the corporate investment cycle.⁴ The Indian economy has also made rapid gains in openness and has gradually integrated with the global economy over the years. Consequently, it is getting increasingly exposed to the vagaries of global headwinds. It is, however, pertinent to note that India’s growth in the last few years is mainly driven by robust domestic demand, especially private consumption and investment, amidst the global slowdown⁵. Looking ahead, we expect real GDP to grow by 6.5 per cent during 2023-24. In all likelihood, India will remain among the fastest growing large economies in 2023.

Regulatory and Supervisory Initiatives

12. In the last few years, we have put in place a stronger and more robust regulatory and supervisory framework. This has served us well in withstanding the scourge of the pandemic and the global financial market turmoil after the outbreak of geo-political hostilities. Our approach to regulation and supervision has been essentially premised on three pillars.

13. First, our focus in recent years has been to strengthen governance and assurance functions within our regulated entities – banks and non-bank financial companies (NBFCs). The emphasis has been on building an environment of trust, transparency and accountability in the financial sector. Some of our regulatory measures include implementation of (i) Liquidity coverage ratio (LCR) and net stable funding ratio (NSFR); (ii) governance guidelines for commercial banks; (iii) scale-based regulatory (SBR) framework for non-banking financial companies (NBFCs), among others. The capital and liquidity requirements are uniformly applied to all scheduled commercial banks (SCBs), irrespective of their asset size and exposure.⁶ Latest supervisory data indicates that all the banks are meeting the various prudential requirements. Stress tests also indicate that even in severe stress conditions, Indian banks will be able to meet the minimum requirements.

14. Second, our supervisory systems have been strengthened significantly in recent years by adopting a unified and harmonised supervisory approach for commercial banks, NBFCs and urban cooperative banks (UCBs).⁷ We have considerably strengthened supervisory macro and micro data analytics to capture potential and emerging risks. Overall, unification of supervisory architecture; ownership-agnostic and risk-focused supervision; shift from episodic to continuous supervision; enhanced off-site surveillance, leveraging on data analytics and SupTech solutions; strengthened on-site supervision; outlier entities identification and deep-dive into vulnerable areas have been the major planks of our supervisory strategy.

15. Third, we focus on identifying and addressing the root causes of vulnerabilities in banks and financial entities rather than dealing with the symptoms alone. We deep dive into the business models of banks and other lending entities and closely monitor their asset liability mismatches and funding stability. We have a system of early warning signals that provide lead indications of risk build-up. Stress tests are also carried out on a continuous basis for both individual entities as well as at the systemic level. We do not interfere with the business decision making of regulated entities, but our approach is to sensitise the senior management of regulated entities for remedial action on any mismatch between the adequacy of internal controls and loss absorption capacity and the risks that their business models generate. We also remain engaged with the external auditors to flag issues that are relevant for their role.

16. Summing up, our approach towards maintaining the stability of the Indian financial system is integral to our conduct of monetary policy as financial instabilities can undermine economic growth and impede monetary policy transmission. We recognize that the likelihood of financial turbulence would be high if there is no price stability. This reinforces our belief in the complementarity of monetary policy and financial stability in the long run.

Effective Communication

17. At the Reserve Bank, we are mindful of the importance of communication, given our multifarious responsibilities and wider ramifications of our actions. We have followed a consultative approach by periodically interacting with various stakeholders on policy formulation.⁸

18. Central bank communication was tested to the hilt and on two major counts as the pandemic unfolded: (a) we had only the digital interface to communicate with media and other stakeholders, and (b) the target audience changed from experts to the general public with attendant challenges⁹. The communication during pandemic times, apart from explaining the measures being taken by RBI, were also a source of confidence and optimism for the common man. The April 2020 statement made by me stated “Although social distancing separates us, we stand united and resolute. Eventually, we shall cure; and we shall endure”. The August 2020 monetary policy statement made by me said, “The pandemic poses a challenge of epic proportions, but our collective efforts, intrepid choices, innovations, and true grit will eventually take us to victory”. These and other such messages reinstated the much-needed confidence, provided market guidance and helped anchor expectations, all of which are important elements of a modern monetary policy framework.

19. The Reserve Bank’s pandemic response was prompt and decisive, with more than 100 measures undertaken since March 2020. The MPC meetings were held ahead of the schedule on two occasions (March and May 2020). I also delivered two other standalone statements outside the Monetary Policy Committee (MPC) cycle – one in April 2020 and the other in May 2021, the latter at the peak of the second (Delta) wave of COVID-19. These off-cycle meetings and standalone statements demonstrated the Reserve Bank’s readiness to undertake prompt and pre-emptive actions. The unequivocal reassurance communicated to the public and other stakeholders through these statements along with our timely measures eased financial conditions considerably while unfreezing markets and reviving trading activity.

20. Effective forward guidance reinforced the impact of our conventional and non-conventional monetary policy actions during the pandemic. As noted earlier, our forward guidance on continuing with accommodative monetary policy amidst transient inflationary shocks was highly effective. Our asset purchase programme – G-sec Acquisition Programme (G-SAP) – provided an upfront commitment to a specific amount of open market purchase of government securities. This measure anchored interest rate expectations and facilitated monetary transmission.

21. Recalibrating the policy path after the pandemic presented its own set of communication challenges. Reversal of certain open-ended policies required careful and nuanced communication to align market expectations with our assessment. Illustratively, the Governor’s policy statement of February 2021 addressed the fears of reversal of monetary policy which were building up due to resumption of liquidity absorption through VRRR operations in January 2021. This was done by explicitly explaining the rationale for the reintroduction of VRRR auctions. Similarly, liquidity rebalancing was set in motion in August 2021 through periodic upscaling of the 14-day main VRRR auction, with the explanation that liquidity conditions need to “evolve in sync with the macroeconomic developments to preserve financial stability”.

22. The assurance given to the markets, the people and all other stakeholders through statements like “We will continue to think and act out of the box, planning for the worst and hoping for the best (June 2021); “The Reserve Bank remains in ‘whatever it takes’ mode, with a readiness to deploy all its policy levers - monetary, prudential or regulatory” (August 2021) demonstrated the central bank’s commitment to remain steadfast in safeguarding trust and confidence in the domestic financial system.

23. In the subsequent tightening phase which commenced in April-May, 2022, the scale and nature of communication has been appropriately fine-tuned and calibrated, so as to ensure successful transmission of policy rate hikes.

24. We also recognise that communication has to be balanced – too much of it may confuse the market while too little may keep it guessing. Communication needs to be backed by commensurate actions to build credibility. We tread a very fine line and constantly endeavour towards refining our communication strategies.

Conclusion

25. Let me now conclude by reflecting upon some key lessons that we have drawn from our experience of the past three years. First, being proactive and nimble footed during a crisis gives one the agility to respond speedily to evolving developments that are overwhelming. In this regard, our decisions at the height of the crisis in 2020 and our liquidity rebalancing measures in 2021 served us well. Second, our measures have been prudent, targeted and calibrated to the need of the hour. We have not been tied down by any existing dogma or orthodoxy. While lowering the floor of the interest rate corridor and increasing its width, we did not inject excessive liquidity or dilute our collateral standards. We kept in mind that what is being rolled out needs to be rolled back in time and in a non-disruptive manner. Third, we backed up our monetary policy actions by appropriate regulatory and supervisory measures, including macro-prudential instruments, that reinforced the policy impact and its credibility. Fourth, we provided guidance and confidence to the market and the wider public through effective communication as part of our endeavour to anchor expectations and sentiments appropriately. Thus, communication became an additional pillar of our overall policy response during the pandemic.

26. In my address today, I have endeavoured to provide a synoptic view of the Indian experience which may be useful for the ensuing discussions in this conference. I once again thank the organisers and Central Banking for this opportunity and wish the Conference all success.

Thank You.

1. The COVID-19 pandemic still continues to keep the world on the edge. The pandemic has so far infected more than 2.3 crore people and has claimed more than 8 lakh lives worldwide. The world is struggling to find a vaccine and/or a cure to the deadly virus. In India also the spread of pandemic continues unabated, though the fatality rate is much lower.

2. As the pandemic ravages on, the economic impact is hard to measure. While there are green shoots and some businesses are getting back to pre-pandemic levels, the uncertainty over the length and intensity of the pandemic and its impact on the economy continue to cause concern. In the wake of the pandemic, RBI has stepped forward and has so far announced various liquidity, monetary, regulatory and supervisory measures in the form of interest rate cuts, higher structural and durable liquidity, moratorium on debt servicing, asset classification standstill and recently a special resolution window within our Prudential Framework for Resolution of Stressed Assets.

3. This framework is a well thought out decision taken in consultation with stakeholders and is aimed at striking a balance between protecting the interest of depositors and maintaining financial stability on one hand, and preserving the economic value of viable businesses by providing durable relief to businesses as well as individuals affected by the Covid-19 pandemic, on the other. We expect efficient and diligent implementation of the resolution plans by the banks, keeping the above objectives in mind. While the moratorium on loans was a temporary solution in the context of the lockdown; the resolution framework is expected to give durable relief to borrowers facing Covid related stress.

4. RBI’s response to the situation arising out of Covid has been unprecedented. The measures taken by the RBI are intended to deal with the specific situation of Covid and can not be permanent. Post containment of COVID-19, I repeat, post containment of Covid, a very careful trajectory needs to be followed for orderly unwinding of the various counter-cyclical measures taken by the RBI and the financial sector should return to normal functioning without relying on the regulatory relaxations and other measures as the new norm.

5. In my address today, I would like to dwell upon the following theme: It is Time for Banks to Look Deeply Within: Reorienting Banking Post-Covid. Just like boosting immunity of the population is the key to tackle pandemics, the key to long term financial stability would be to foster tangible improvement in the inherent ability of the banks to withstand the exogenous shocks like the current pandemic. As I have stated elsewhere, the causes of weak banks can usually be traced to one or more of the following conditions: an inappropriate business model given the business environment; quality or the lack of governance and decision making; misalignment of internal incentive structures with external shareholder/stakeholder interests¹ and other factors. Accordingly, the core of resilient banks is made up of good governance, effective risk management and robust internal controls. This is not to say that Indian banks do not have sound governance and risk management systems in place. There is always scope for improvement and these are the areas which need greater attention going forward.

6. In recent years, the business landscape of banks has undergone significant change. Today the banks need to look out for ‘sunrise’ sectors while supporting those which have the potential to bounce back. For instance, Banks need to look at prospective business opportunities in the rural sector which remain unexplored despite efforts to support it. They need to look at start-ups, renewables, logistics, value chains and other such potential areas. The banking sector has a responsible role to play not only as a facilitator of growth of the economy but also to earn its own bread. Thus, a complete relook at the business strategy and orientation is the immediate need of the hour.

7. Scale ignites the volume effect in business turnover; but that presupposes bigger size of the banks. Despite several reforms in the banking sector since its nationalisation, lot more needs to be done. With change in time, the nature of reforms needs to be reconfigured. The current steps towards consolidation of public sector banks in line with the Narasimham Committee recommendation is a step in the right direction. Indian banks this way can reap the benefits of scale, and become partners in the newer business opportunities across the globe. Larger and more efficient banks, both in public and private sector, can compete shoulder to shoulder with the global banks to get a decent space in the global value chains.

8. Size is essential, but efficiency is even more important. Efficiency, however, is a much broader concept and requires several other factors to evolve and act along its side. The prerequisite will be use of technology. The quality and ingenuity of technology should match our aspirations of acquiring scale and diversion of business across the globe. The focus of use of technology should shift from ‘transactions-based’ to ‘business-oriented’. We have a pocket full of technological tools like big-data, artificial intelligence, machine learning to leverage upon , in order to be able to compete with the global players in reaping the benefits of ‘creativity’ looming large all over.

9. While introspecting on newer ideas to improve the health of banks and quality of banking, it is fundamental to reform the culture of governance and risk management systems. These two areas lend inherent strength to the business of banking and good amount of work has been done in this direction over the years. The RBI has issued a discussion paper on ‘Governance in Commercial Banks’, for comments from various stakeholders. Ideally, efficiency should be ownership-neutral. While it is natural that the capital-providers or investors would like to remain alive to the aspects of how exactly a bank is run, it is worthwhile to allow sufficient leeway to the Board and management of a bank to run the affairs of a bank in a professional and autonomous manner. A decent distance between the owner and the professionally sound management and Board would promote robustness of banking institutions.

10. There will be newer risks with newer business models. More so, when banks get bigger and more connected across diverse jurisdictions. High growth by virtue of newer business models can be achieved with clear understanding of one’s own strengths and weakness. Remaining overly risk-averse may seem to be a measure of self-immunisation; but will be self-defeating as it would affect the bottom lines adversely. Risk propensity should be in alignment with the individual bank’s measured risk-appetite. The risk management system should be sophisticated enough to smell vulnerabilities brewing within the various businesses well in advance and should be dynamic enough to capture looming risks in sync with the changes in external environment and best practices.

11. One visible area of concern in the arena of risk management is the inability to manage the operational risk/s, more particularly controlling the incidence of frauds, both cyber-related and otherwise. The higher incidence of frauds which have come to light in the recent times have their origins in not so efficient risk management capacity of the banks, both at the time of sanctioning of loans as well as in post sanction credit monitoring. It is observed that it takes many months after a fraud is committed before it comes to light. Banks need to tighten their underwriting and credit monitoring standards and ensure that incidences of frauds are reduced by early detection and are followed up by initiating appropriate legal action against the fraudsters. Here too, the need is to leverage on technology, namely, artificial intelligence, to study the patterns of such incidences and the root cause behind their recurrence.

12. An effective early warning system and forward-looking stress testing framework should be an integral part of the risk management framework of the banks. Banks should be able to pick-up incipient signals of stress faced by their borrowers, and take proactive remedial action, which may include a viable resolution of the credit facilities aimed at preserving the value of the assets and not just aimed at reducing the short term burden on the balance sheet of the banks.

13. In addition to a strong risk culture, banks should also have appropriate compliance culture. Cost of compliance should be perceived as an investment, as inadequacy of the same will prove to be very costly. The compliance culture of banks should ensure adherence to laws, rules, regulations and various codes of conduct. Compliance should go beyond what is legally binding and attempt to embrace broader standards of integrity and ethical conduct². The essential features of the compliance culture are broadly similar to the essential features of risk culture. All these will also help to maintain a high degree of market reputation which is imperative for retaining customers and commanding a higher valuation amongst the investors.

14. A good governance framework and effective risk and compliance culture should be complemented by a robust assurance mechanism by way of internal audit function. This is an integral part of sound corporate governance which should provide an independent assurance to the Board of the bank as well as to external stakeholders that the operations of the entity are performed in accordance with the set policies and procedures.

15. The competition in the Indian banking system has been increasing over the years and unless banks meet the expectations of their target customers, even a well thought out business model may not succeed. In this context, quality of customer service and redress of customer grievances assume high importance. We have to recognize that banks exist for customers viz. both depositors and borrowers.

16. India’s banking and financial system has displayed tremendous operational resilience in the face of Covid and lockdowns. Going ahead, financial institutions in India have to walk a tightrope of nurturing the recovery within the overarching objective of preserving long-term stability of the financial system. The current pandemic related shock is likely to place greater pressure on the balance sheets of banks leading to erosion of their capital. Proactive building of buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system - resilience of individual banks and financial entities as well as resilience of the financial sector as a whole. We have already advised all banks, large non-deposit taking NBFCs and all deposit-taking NBFCs to assess the impact of COVID-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy. Based on the outcome of such stress testing, banks and NBFCs should work out possible mitigation measures including capital planning, capital raising, and contingency liquidity planning, among others. Upfront capital infusion would also improve the sentiment of investors and other stakeholders alike for the sector to continue remaining attractive for investors, both domestic and foreign, over the medium to long-term. Some of the banks have already either raised or announced capital raising. This process needs to be carried forward vigorously by Banks and NBFCs, both in the public and private sector.

17. In conclusion, I would like to say that Covid-19 poses several challenges for banks and the financial sector. Proactive action on various fronts – some of which I have highlighted – will enable us to deal with these challenges effectively and maintain the soundness of Indian banking system. I am reminded here of a quote from Leo Tolstoy in War and Peace: “a battle is won by those who firmly resolve to win it!”

1. The COVID-19 pandemic still continues to keep the world on the edge. The pandemic has so far infected more than 2.3 crore people and has claimed more than 8 lakh lives worldwide. The world is struggling to find a vaccine and/or a cure to the deadly virus. In India also the spread of pandemic continues unabated, though the fatality rate is much lower.

2. As the pandemic ravages on, the economic impact is hard to measure. While there are green shoots and some businesses are getting back to pre-pandemic levels, the uncertainty over the length and intensity of the pandemic and its impact on the economy continue to cause concern. In the wake of the pandemic, RBI has stepped forward and has so far announced various liquidity, monetary, regulatory and supervisory measures in the form of interest rate cuts, higher structural and durable liquidity, moratorium on debt servicing, asset classification standstill and recently a special resolution window within our Prudential Framework for Resolution of Stressed Assets.

3. This framework is a well thought out decision taken in consultation with stakeholders and is aimed at striking a balance between protecting the interest of depositors and maintaining financial stability on one hand, and preserving the economic value of viable businesses by providing durable relief to businesses as well as individuals affected by the Covid-19 pandemic, on the other. We expect efficient and diligent implementation of the resolution plans by the banks, keeping the above objectives in mind. While the moratorium on loans was a temporary solution in the context of the lockdown; the resolution framework is expected to give durable relief to borrowers facing Covid related stress.

4. RBI’s response to the situation arising out of Covid has been unprecedented. The measures taken by the RBI are intended to deal with the specific situation of Covid and can not be permanent. Post containment of COVID-19, I repeat, post containment of Covid, a very careful trajectory needs to be followed for orderly unwinding of the various counter-cyclical measures taken by the RBI and the financial sector should return to normal functioning without relying on the regulatory relaxations and other measures as the new norm.

5. In my address today, I would like to dwell upon the following theme: It is Time for Banks to Look Deeply Within: Reorienting Banking Post-Covid. Just like boosting immunity of the population is the key to tackle pandemics, the key to long term financial stability would be to foster tangible improvement in the inherent ability of the banks to withstand the exogenous shocks like the current pandemic. As I have stated elsewhere, the causes of weak banks can usually be traced to one or more of the following conditions: an inappropriate business model given the business environment; quality or the lack of governance and decision making; misalignment of internal incentive structures with external shareholder/stakeholder interests¹ and other factors. Accordingly, the core of resilient banks is made up of good governance, effective risk management and robust internal controls. This is not to say that Indian banks do not have sound governance and risk management systems in place. There is always scope for improvement and these are the areas which need greater attention going forward.

6. In recent years, the business landscape of banks has undergone significant change. Today the banks need to look out for ‘sunrise’ sectors while supporting those which have the potential to bounce back. For instance, Banks need to look at prospective business opportunities in the rural sector which remain unexplored despite efforts to support it. They need to look at start-ups, renewables, logistics, value chains and other such potential areas. The banking sector has a responsible role to play not only as a facilitator of growth of the economy but also to earn its own bread. Thus, a complete relook at the business strategy and orientation is the immediate need of the hour.

7. Scale ignites the volume effect in business turnover; but that presupposes bigger size of the banks. Despite several reforms in the banking sector since its nationalisation, lot more needs to be done. With change in time, the nature of reforms needs to be reconfigured. The current steps towards consolidation of public sector banks in line with the Narasimham Committee recommendation is a step in the right direction. Indian banks this way can reap the benefits of scale, and become partners in the newer business opportunities across the globe. Larger and more efficient banks, both in public and private sector, can compete shoulder to shoulder with the global banks to get a decent space in the global value chains.

8. Size is essential, but efficiency is even more important. Efficiency, however, is a much broader concept and requires several other factors to evolve and act along its side. The prerequisite will be use of technology. The quality and ingenuity of technology should match our aspirations of acquiring scale and diversion of business across the globe. The focus of use of technology should shift from ‘transactions-based’ to ‘business-oriented’. We have a pocket full of technological tools like big-data, artificial intelligence, machine learning to leverage upon , in order to be able to compete with the global players in reaping the benefits of ‘creativity’ looming large all over.

9. While introspecting on newer ideas to improve the health of banks and quality of banking, it is fundamental to reform the culture of governance and risk management systems. These two areas lend inherent strength to the business of banking and good amount of work has been done in this direction over the years. The RBI has issued a discussion paper on ‘Governance in Commercial Banks’, for comments from various stakeholders. Ideally, efficiency should be ownership-neutral. While it is natural that the capital-providers or investors would like to remain alive to the aspects of how exactly a bank is run, it is worthwhile to allow sufficient leeway to the Board and management of a bank to run the affairs of a bank in a professional and autonomous manner. A decent distance between the owner and the professionally sound management and Board would promote robustness of banking institutions.

10. There will be newer risks with newer business models. More so, when banks get bigger and more connected across diverse jurisdictions. High growth by virtue of newer business models can be achieved with clear understanding of one’s own strengths and weakness. Remaining overly risk-averse may seem to be a measure of self-immunisation; but will be self-defeating as it would affect the bottom lines adversely. Risk propensity should be in alignment with the individual bank’s measured risk-appetite. The risk management system should be sophisticated enough to smell vulnerabilities brewing within the various businesses well in advance and should be dynamic enough to capture looming risks in sync with the changes in external environment and best practices.

11. One visible area of concern in the arena of risk management is the inability to manage the operational risk/s, more particularly controlling the incidence of frauds, both cyber-related and otherwise. The higher incidence of frauds which have come to light in the recent times have their origins in not so efficient risk management capacity of the banks, both at the time of sanctioning of loans as well as in post sanction credit monitoring. It is observed that it takes many months after a fraud is committed before it comes to light. Banks need to tighten their underwriting and credit monitoring standards and ensure that incidences of frauds are reduced by early detection and are followed up by initiating appropriate legal action against the fraudsters. Here too, the need is to leverage on technology, namely, artificial intelligence, to study the patterns of such incidences and the root cause behind their recurrence.

12. An effective early warning system and forward-looking stress testing framework should be an integral part of the risk management framework of the banks. Banks should be able to pick-up incipient signals of stress faced by their borrowers, and take proactive remedial action, which may include a viable resolution of the credit facilities aimed at preserving the value of the assets and not just aimed at reducing the short term burden on the balance sheet of the banks.

13. In addition to a strong risk culture, banks should also have appropriate compliance culture. Cost of compliance should be perceived as an investment, as inadequacy of the same will prove to be very costly. The compliance culture of banks should ensure adherence to laws, rules, regulations and various codes of conduct. Compliance should go beyond what is legally binding and attempt to embrace broader standards of integrity and ethical conduct². The essential features of the compliance culture are broadly similar to the essential features of risk culture. All these will also help to maintain a high degree of market reputation which is imperative for retaining customers and commanding a higher valuation amongst the investors.

14. A good governance framework and effective risk and compliance culture should be complemented by a robust assurance mechanism by way of internal audit function. This is an integral part of sound corporate governance which should provide an independent assurance to the Board of the bank as well as to external stakeholders that the operations of the entity are performed in accordance with the set policies and procedures.

15. The competition in the Indian banking system has been increasing over the years and unless banks meet the expectations of their target customers, even a well thought out business model may not succeed. In this context, quality of customer service and redress of customer grievances assume high importance. We have to recognize that banks exist for customers viz. both depositors and borrowers.

16. India’s banking and financial system has displayed tremendous operational resilience in the face of Covid and lockdowns. Going ahead, financial institutions in India have to walk a tightrope of nurturing the recovery within the overarching objective of preserving long-term stability of the financial system. The current pandemic related shock is likely to place greater pressure on the balance sheets of banks leading to erosion of their capital. Proactive building of buffers and raising capital will be crucial not only to ensure credit flow but also to build resilience in the financial system - resilience of individual banks and financial entities as well as resilience of the financial sector as a whole. We have already advised all banks, large non-deposit taking NBFCs and all deposit-taking NBFCs to assess the impact of COVID-19 on their balance sheet, asset quality, liquidity, profitability and capital adequacy. Based on the outcome of such stress testing, banks and NBFCs should work out possible mitigation measures including capital planning, capital raising, and contingency liquidity planning, among others. Upfront capital infusion would also improve the sentiment of investors and other stakeholders alike for the sector to continue remaining attractive for investors, both domestic and foreign, over the medium to long-term. Some of the banks have already either raised or announced capital raising. This process needs to be carried forward vigorously by Banks and NBFCs, both in the public and private sector.

17. In conclusion, I would like to say that Covid-19 poses several challenges for banks and the financial sector. Proactive action on various fronts – some of which I have highlighted – will enable us to deal with these challenges effectively and maintain the soundness of Indian banking system. I am reminded here of a quote from Leo Tolstoy in War and Peace: “a battle is won by those who firmly resolve to win it!”

amaskar! Good afternoon

I am honoured to be invited to the Lal Bahadur Shastri National Academy of Administration (LBSNAA), a temple of independent India with a rich and hallowed history that predates independence. I thank Madam Sowjanya for her gentle perseverance and deft management of logistics that made it possible for me to be here. I understand that this is the 18th round of phase IV of the Academy’s mid-career training programme. Participants here have already put in 15 to 18 years in the service of the nation and are, therefore, primed to lead our country over the next 40-50 years in the quest of our national vision of becoming a developed country. The nation looks up to you to fulfil that vision, as you will wield public policy and confront the challenges of governance as you steer the nation towards its aspirational goal. While doing so, you will have to manage tectonic vicissitudes in the form of organisational and technological changes as well as structural transformations in various sectors of the economy. I do hope my talk will be able to shine a little light on the journey before you.

It is in this context that I will speak to you about monetary policy but I will situate it in the milieu of the next forty to fifty years so as to bring out some perspectives on the opportunities and challenges that will rise up to meet you as you take India towards its future.

First Principles

It is important to appreciate the guiding tenets that shape the design and conduct of monetary policy.

First, within the arsenal of public policy instruments, monetary policy is distinguished by its rapid deployability because the situations it has to encounter warrant immediate action. Hence it is typically assigned the task of stabilisation of the economy around its productive capacity. Illustratively, when aggregate demand or total spending exceeds the country’s productive potential, imbalances develop that can easily throw the economy off course. The first signs of these imbalances are usually price pressures or inflation. Accordingly, monetary policy acts to dampen aggregate demand and bring it in alignment with productive capacity. Analogously, when demand falls below productive capacity, deflationary conditions can develop and hence monetary policy has to boost the economy to restore balance between demand and supply.

Second, monetary policy has to be forward looking. At any point in time, the information available to monetary policy authorities on the goal variables is lagged – on a measure of economic activity such as gross domestic product (GDP) for instance, information available at any point of time is typically three months old, i.e., relating to January-March in India; information on consumer prices in India is available only for May. Furthermore, policy impulses travel through the structure of the interest rates with variable and uncertain lags – changes in the policy interest rate take time to be fully reflected in lending rates charged by banks and other financial institutions. So, more often than not, monetary policy has to shoot blind. Besides, the goal variables are in motion and hence, monetary policy has to shoot forward. For this purpose, it uses all available information like a radar screen to track the formations of moving goal variables, and target them accurately. This task becomes even more complicated when dealing with their likely course into the unforeseen future such as over the next forty to fifty years. We shall get there presently.

Third, as Jan Tinbergen, the 1969 Nobel Prize winner for economics showed, any policy is most efficient in achieving its goals when it follows an assignment rule - if there is one instrument such as the policy interest rate, there should be one goal. If instead, monetary policy is overburdened with too many goals but is hamstrung with too few instruments, there is every likelihood that the instrument will end up hitting none of the goals.

Fourth, monetary policy should be conducted in terms of some rule like behaviour that binds it to pursue its goals across time. Instead, if it falls prey to the temptation of exploiting short-run trade-offs – like abandoning inflation control in the short run and boosting growth or what economists call time inconsistency – it will ultimately lose sight of its objective because in the short-run pursuit of growth, inflation may be allowed to rise to levels that can be inimically harmful to growth.

Fifth, modern monetary policy authorities have found that the efficacy of monetary policy is enhanced when it is supported by clear and transparent communication about the intent of policy actions and stance in the context of its goals and the manner and time frame in which they are to be achieved. Communication makes monetary policy accountable as the public is able to measure its impact. This, in turn, makes it credible by binding the policy authority to its stated intent and constraining unbound discretion in seeking short-term gains at the cost of medium-term goals. In fact, high credibility obviates the need for large policy changes or even of any changes at all if the public believes in the welfare orientation of policy. As a result, communication helps to anchor the expectations of the public to the goals of monetary policy so that policy makers and all stakeholders work with a common set of expectations. Stability in the expectations around policy, its conduct and its goals engenders macroeconomic stability which provides solid foundations for medium-term growth prospects.

Reading the Pitch

Monetary policy has an intrinsic domestic orientation. Hence, a good understanding of the characteristics of the economy it serves and the path along which economic activity is most likely to evolve is key to fashioning and implementing good monetary policy. In the context of the time horizon that I chose at the outset, the question to ask is: where are we today, and where do we go from here?

By 2023-24, i.e., the year just gone by, India had become a ₹295.4 lakh crore or US$ 3.6 trillion dollars economy at current exchange rates. At a per capita income of ₹2,07,030 or US$ 2,500, India belongs in the lower middle income group of countries. Reaching here has been an eventful and arduous journey, marked by what statisticians call ‘structural breaks’. The first one occurred in 1980, marking the end of a period since independence when GDP growth averaged 3.6 per cent or the so-called Hindu rate of growth. It was the age of inwardness. From 1980 up to the second break around 2002, growth trended up to an average rate of 5.5 per cent as India opened up, dismantled barriers to trade and capital flows, and peered outwards. The third break was caused by the pandemic in 2020. Between 2002 and 2020, the gains of liberalisation and structural transformation were consolidated and trend growth shifted up to close to 7 per cent, only to be interrupted by the precipitous decline in GDP by 5.8 per cent in 2020-21. Backed by nation-wide inoculations and the steadying hand of astute macroeconomic policy support, however, there has been a robust rebound in the post-pandemic period. Although too early to tell in view of lack of adequate data points, another structural shift may be forming that is powering trend growth to above 8 per cent – the fastest growing major economy in the world today. In 2024, the International Monetary Fund (IMF) projects that India is going to contribute about one-sixth of global growth².

It has been estimated that if India can grow at the rate of 9.6 per cent per annum over the next ten years, it will break free of the shackles of the lower middle income trap and become a developed economy. These gains need to be reflected in per capita income with two milestones – a per capita income level of US$ 4516-14,005 to reach middle income country status, and beyond that level to attain the position of a developed country today. By 2047, however, the developed country threshold will have moved up to US$ 34,000.

Current exchange rates determined in the market are subject to bouts of volatility and idiosyncratic behaviour that makes them diverge from reality. Hence, their application as denominators to GDP measured in national currencies may not be appropriate for cross-country comparisons. An alternative measure is purchasing power parity (PPP). It is the price of an average basket of goods and services in each country. With PPP, the comparison changes dramatically. In terms of PPP, India is the third largest economy in the world. The US$ 5 trillion milestone for 2027 translates to US$ 16 trillion in PPP terms. The Organisation for Economic Cooperation and Development (OECD) projects that in PPP terms, India will overtake the US by 2048 to become the second largest economy of the world.

To paraphrase from Victor Hugo, there is nothing more powerful than a country whose time has come. The age of Japan started in the 1960s and lasted up to the 1980s. The age of China began in the early 1990s, taking it to the position of the second largest economy of the world. It is from 2010 that India’s time has come. Several forces are coming together for India to surge ahead and assume its rightful place as a world leader over the next two-three decades.

Tailwinds

In the formulation of monetary policy, it is considered good housekeeping to evaluate the balance of risks. There are several positive energies that are helping to shape the vision of India’s future over the next few decades. The playout of these forces will condition the setting of future monetary policy.

First, there is a traditional advantage that is likely to continue working in favour of India’s growth prospects. The development process has been predominantly driven by capital accumulation, which makes investment the main lever of growth. The investment rate peaked at close to 40 per cent of GDP in 2010-11 but moderated unevenly thereafter until 2020-21. During 2021-23, however, it has stabilised around 31.2 per cent and is showing signs of acceleration. Historically, India’s investment has been financed by domestic savings, with households being the prime provider of resources to the rest of the economy. In the period 2021-23, the gross domestic saving rate has averaged 30.7 per cent of gross national disposable income. Thus, unlike many countries, India does not have to depend on foreign resources, which play a minor and supplemental role in the growth process. In fact, the mirror image of this phenomenon – the current account gap in the balance of payments – has remained modest at around 1 per cent of GDP in 2023-24. This provides insulation to the Indian economy from external shocks and imparts viability and strength to the external sector. Illustratively, India’s gross external debt, which is the accumulation of current account deficits over time, is less than 20 per cent of GDP and almost entirely covered by the level of foreign exchange reserves. Debt service, i.e., interest and principal repayments are together less than 7 per cent of current receipts. As regards the supersavers – households – there is evidence of switching from financial saving to physical saving, with the latter being financed by accretions to households’ financial liabilities.

Second, the rising growth trajectory on which India is poised is entrenched by macroeconomic and financial stability. After a long and arduous battle with the upside pressures unleashed by the pandemic and geopolitical conflicts, and exacerbated by sporadic onslaughts of food supply shocks, inflation has fallen back into the tolerance band around the target of 4 per cent. This reflects the cumulative impact of steadfast monetary policy actions and supply management. In fact, core inflation that excludes food and fuel and is most amenable to monetary policy has fallen to its lowest level ever. The RBI has anchored expectations by remaining committed to aligning inflation with the target and regards the recent easing of price pressures as work in progress. It projects inflation to average 4.5 per cent in 2024-25 and 4.1 per cent in 2025-26. The taming of inflation lays the foundations of sustained high growth in the future by improving consumption conditions, the investment outlook and external competitiveness.

Alongside macroeconomic stability, financial stability is getting reinforced by prudent financial policies and active on-site supervision complemented with off-site surveillance, which harnesses SupTech, big data analytics and cyber security drills. India’s financial sector is predominantly bank-based. Gross non-performing assets (GNPAs) in the banking system have steadily fallen from their peak in March 2018 to 2.8 per cent of total assets by March 2024. Adjusted for provisions, net NPAs are just 0.6 per cent. Capital and liquidity buffers are well above the regulatory norms. Profitability is high and this virtuous circle has supported a credit upswing. Stress tests for credit risk and interest rate risk reveal that banks would remain above minimum capital requirements even under severe stress scenarios. Similar improvements are evident among non-banking financial companies. The rising strength and resilience of the financial sector augurs well for medium-term growth prospects as it is the financial sector which intermediates the resource requirements of the growth process.

Another aspect of macroeconomic stability is the ongoing fiscal consolidation. As a result, the general government debt which is estimated at 81.6 per cent of GDP at the end of March 2024 is expected to decline to 78.2 per cent by end of this decade by the IMF. Our projections show that if expenditures are increased on reskilling/upskilling the labour force in the most productive sectors of manufacturing, investing in digitalisation and promoting energy efficiency, the general government debt will fall even further to 73.4 per cent of GDP by 2030-31³. This is significant in the context of the IMF’s projections that show the debt ratio as projected to rise to 116.3 per cent in 2028 for advanced economies and to 78.1 per cent for emerging and middle-income countries.

A potent growth accelerator emerges from India’s favourable demographic dynamics. India’s population, once regarded as a Malthusian curse, is now regarded as its greatest asset in an inter-temporal perspective, especially when the rest of the world ages rapidly and populations shrink. Today, every sixth working age person in the world is an Indian. With a median age of 28 years, the share of the working age cohort in the total population will keep rising upto the mid-2050s, with commensurate benefits in terms of growth in income and savings. India’s demographic dividend is expected to last for more than three decades. Every effort must be made to reap this opportunity.

Another growth multiplier is India’s digital revolution. India is emerging as a world leader in leveraging digital technologies for transformative change. The trinity of JAM – Jan Dhan (basic no-frills accounts); Aadhaar (universal unique identification); and mobile phone connections – is expanding the ambit of formal finance, boosting tech start-ups and enabling the targeting of direct benefit transfers. India’s Unified Payment Interface (UPI), an open-ended system that powers multiple bank accounts into a single mobile application is propelling inter-bank peer-to-peer and person-to-merchant transactions seamlessly. Payment systems in India operate on a 24 by 7 by 365 basis. Functionalities like offline payments, payments through feature phones and conversational payments have been incorporated. The internationalisation of the UPI is progressing rapidly.

Headwinds

India’s progress towards its developmental ambitions will encounter challenges or what are termed in monetary policy analysis as downside risks. Successfully navigating them will test the conduct of monetary policy as India forges ahead to seek its destiny.

The key to harnessing the demographic dividend is in raising the contribution of the labour force to gross value added. In spite of recent improvements in job creation and rewards to higher skills, the shares of both quantity and quality – which refers to returns to skill formation – of India’s labour is low by international standards. In terms of appropriate skills for a specific job, only 51 per cent is employable, warranting concerted efforts to re-skill and upskill the work force in tune with changing job requirements and technological change⁴. More than 80 per cent of the workforce is employed in the informal sector and this highlights the need for expanding the formalisation of employment. Furthermore, India ranks low in women’s participation in the workforce. Increasing female labour participation is a key challenge, needing social norms in favour of working women; incentivising diversity in educational institutions and workplaces; flexible working hours and women friendly policies and facilities at work places; and promoting work-life balance.

Another formidable challenge is the building of high quality infrastructure. India’s per capita investment in infrastructure at US $ 90 in constant 2015 dollars needs to be scaled up by lifting infrastructure investment from around 4 per cent of GDP to at least 6 per cent of GDP. This will require enabling regulations, faster clearances, smooth land acquisition and climate clearance policies, and adequate infrastructure finance. The sustained infrastructure spending and logistics push across successive union budgets is creating the environment for financing India’s infrastructure goal.

The formalisation of jobs will be facilitated by developing a high class manufacturing base to absorb low- and intermediate-skill labour migrating from primary occupation. India largely bypassed manufacturing in its developmental journey - services account for two-thirds of India’s economy today while manufacturing accounts for about 17 per cent. Since the 1990s, the average growth of manufacturing has been 7 per cent. With 7.5 per cent growth, manufacturing’s share could rise to 20 per cent of GVA by 2030-31. If the growth rate of manufacturing can be raised to 10 per cent, the share of manufacturing in gross value added can rise to 25 per cent, bringing India into striking distance of becoming a global manufacturing hub with forward and backward linkages for other sectors of the economy. To achieve this, India must adapt to the fourth industrial revolution (automation; data exchange; cyber-physical systems, the Internet of things; cloud computing; cognitive computing and creating the smart factory, advanced robotics). In order to succeed as a manufacturing power, a skilled labour force will hold the key.

India’s manufacturing must find expression in global markets – make in India for the world. A vibrant and diversified manufacturing base is essential for boosting India’s exports. Intensified efforts need to be made to raise India’s exports of goods and services from US$ 768 billion or 2.4 per cent of the world total to US$ 1 trillion each for merchandise and service exports or 5 per cent of the global total by 2030. The potential exists in the form of sectors such as IT and digital services, high value agricultural products; high-value tourism; financial services; retail and e-commerce. India is preparing for this export thrust through initiatives such as the production-linked incentive scheme, districts as export hubs; and supporting the export potential of micro, small and medium enterprises (MSMEs). Global Capability Centres (GCCs) set up in India are already exploiting these innate strengths. They are already leveraging on India’s workforce, leading product innovation, driving technological advancements, creating next-gen intellectual property (IP) and spearheading digitalisation initiatives.

As India emerges as an export powerhouse backed by a strong manufacturing base, a natural corollary will be the full internationalisation of the Indian rupee. Several factors are already in place. The Indian diaspora is the biggest in the world and India is the top recipient of remittances. The Indian rupee trades three times more offshore than onshore. India is expanding local currency settlement arrangements with several countries in Asia and the middle east and interlinking of payment systems is underway. Deep and liquid financial markets are developing. The international financial centre in GIFT city, Gujarat is emerging as global financial and technology hub with a thriving financial ecosystem. The policy emphasis on macroeconomic and financial stability is also a positive for the INR going international.

The last challenge I will dwell upon is the greening of the Indian economy for sustainable development. This involves managing climate change. Climate change is overwhelming us, putting the planet and humanity at risk. It is manifesting itself at an alarming scale and pace globally, undermining livelihoods, infrastructure, and endangering health, food, energy, and water security. Climatic disasters are occurring more frequently and across the globe. The year 2023 turned out to be the hottest ever. In 2024, India is experiencing among its worst heatwaves and forest fires. Bengaluru is facing a water crisis. Reservoirs are going dry. Australian and US weather agencies are predicting floods in this monsoon season due to La Nina. We cannot be immune or inactive any longer.

At the Conference of the Parties 26 (COP26) in 2021, India’s commitment towards the environment by 2030 has included: (i) 500 GW non-fossil energy capacity; (ii) energy mix comprising 50 percent renewable energy; (iii) reducing total projected carbon emissions by one billion tonnes; (iv) reducing the carbon intensity of its economy by less than 45 percent; and (v) achieving net zero by 2070. It is estimated that a cumulative investment of US$ 10.1 trillion is needed along with adequate access to meet technological requirements.

Conclusion

Given the innate strengths I described and the resolve to achieve its aspirational goals, it is possible to imagine India striking out into the next decade to become the second largest economy in the world not by 2048, but by 2031 and the largest economy of the world by 2060.

What is the role of monetary policy in this context? The principal task of monetary policy is become the anchor of the Indian economy. Short-run fluctuations of aggregate demand have to be managed pro-actively so that a broad alignment with the economy’s evolving productive capacity is ensured. Price stability is the best contribution that monetary policy can make to strengthen the foundations of the aspired trajectory of growth over the next few decades. The formation of inflation in India needs to be navigated towards convergence with global inflation so that both the internal and external value of the rupee is preserved. This will prepare the ground for the internationalisation of the rupee and the emergence of India as the economic powerhouse of the world of tomorrow.

¹ Address delivered by Michael Debabrata Patra, Deputy Governor, Reserve Bank of India (RBI) in the Mid-Career Training Programme for officials of the Indian Administrative Service on July 9, 2024 at the Lal Bahadur Shastri National Academy of Administration, Mussoorie. Valuable comments received from Harendra Behera, Asish Thomas George, and editorial help from Vineet Kumar Srivastava are gratefully acknowledged.

² World Economic Forum 54th Annual Meeting; January 15, 2024.

³ Patra, M.D., Behera, S., Behera, H., Banerjee, S., Padhi, I. and Sood, S. (2024). The Shape of Growth Compatible Fiscal Consolidation. RBI Bulletin, February.

Shri Ajay Bhushan Prasad Pandey, Chairperson, National Financial Reporting Authority; Shri M R Rao, Deputy Governor Reserve Bank of India; Executive Directors from Reserve Bank of India; CA Ranjeet Agarwal, President Institute of Chartered Accountants of India; Auditors and Chief Financial Officers from the Banks and All India Financial Institutions; my colleagues from the Reserve Bank of India; Ladies and Gentlemen. Good morning.

1. It is indeed an honour to address this distinguished gathering of Auditors and Chief Financial Officers – one of the key pillars of financial integrity and governance in our banking system. Today’s conference is a first of its kind in terms of the target audience but is part of a series of engagements that the Reserve Bank has been having with its regulated entities, underlining the critical importance of governance and assurance functions.

2. The theme of the conference today, Shared Vision and Shared Responsibilities, is reflective of the synergies between the roles of auditors and bank supervisors, which are both critical to the health and stability of our financial system. Together, we share a vision and responsibility for advancing assurance and banking supervision.

Role of CFO and expectations

3. Today, we have CFOs of banks and All India Financial Institutions amongst us. Having served as a CFO myself of a bank, I deeply understand the immense responsibilities this role entails. All I can wish for you is that may your audits be clean, your numbers accurate, and your coffee always strong!

4. As CFOs, you are tasked with ensuring the accuracy, completeness, and integrity of the bank’s financial statements and reports. Further you need to do all of this while meeting strict statutory and regulatory deadlines. Although there is a Chief Risk Officer dedicated to risk management, the CFO's contribution in this area is crucial, particularly in managing capital adequacy, maturity mismatches and liquidity. CFOs also play a pivotal role in strategic planning, budgeting and investor relations – in short, shaping the financial future of their institutions. In fact, in today’s dynamic financial landscape, the role of the CFO is not just about numbers but also about leading the institution towards sustainable growth and resilience. From personal experience, I can say the job would not be as interesting if it was only about numbers!

5. Given these extensive functions, CFOs are deeply intertwined with the bank's daily operations and possess a profound understanding of their institution's strengths and weaknesses far better than any other heads of business or other vertical heads within the organisation. This intimate knowledge places CFOs in a unique position of responsibility. It is this position which has a visibility of the entire bank and its key levers of financial strength in one place, probably next only to the CEO. It is, therefore, their duty to familiarise auditors and supervisors with the nuances of the bank’s operations, particularly new auditors and first-time members of supervisory teams. By providing a comprehensive overview and context, CFOs can help these teams gain a clearer understanding of the bank’s internal environment, challenges, and strategic objectives. This not only facilitates more effective audits and supervision but also fosters a collaborative relationship aimed at enhancing the bank’s overall performance and regulatory compliance.

6. Integral to this collaboration is the need for CFOs to maintain open and honest communication channels with auditors and bank supervisors. It is imperative to eschew the notion of hiding, withholding, or providing incomplete information to these teams. Transparency is key; by sharing comprehensive and accurate data, CFOs not only facilitate a smoother audit and supervision process but also reinforce the bank’s commitment to integrity and compliance. This collaboration builds trust, ensures regulatory adherence, and ultimately contributes to the financial stability and reputation of the institution.

7. It is equally true internally as well. The CFOs must protect the integrity of the financial reporting by guarding against any misadventure or intelligent interpretation of regulations or accounting standards. I would urge the CFOs to have an eye for detail and an honest and transparent communication with the MD & CEO and the rest of the top management. You should also keep alive the channel of escalation to the Chair of the Audit Committee of the Board (ACB), if a higher level of guidance is needed in any matter.

8. CFOs should conduct thorough root cause analyses of any deficiencies observed during audits or supervisory reviews. Rather than implementing short-term fixes, understanding and addressing the underlying causes of these issues ensures that compliance is sustained over the long term. This approach helps prevent the recurrence of problems and strengthens the overall governance and control environment of the bank.

9. One area that has come into sharper focus in the last couple of years is the control and management of internal accounts. We found certain banks having lakhs of such accounts with apparently no valid reason. Some of these accounts were also used as a conduit for certain fraudulent transactions and ever-greening of loan accounts. Internal accounts are high risk in nature on account of its potential for misuse. I therefore request the CFOs to have them rationalised completely, bring them down to the essential minimum and exercise greater control through periodical reconciliation and a proper reporting to ACB.

10. I would also urge CFOs to invest in technology and data analytics which would empower them to provide more accurate and real-time financial insights. This not only aids in strategic decision-making but also enhances the ability to respond swiftly to any issues identified during audits or supervisory reviews.

Role of Auditors and Expectations

11. The primary responsibility for preparing accurate financial statements rests with the management of banks, with Chief Financial Officers playing a pivotal role. However, the role of auditors is equally critical. All stakeholders, including regulators, investors, and most importantly, depositors, rely on the assurance provided by auditors that financial statements reflect a true and fair view of the bank’s position and performance, free of material misstatements. This role becomes even more crucial in the banking sector, where trust is paramount.

12. All of you would be familiar with the three lines of defence model. The first line of defence is Line management, followed by Compliance and Risk Management with the third line being Internal Audit. Together they constitute the internal defence mechanism in a bank. But the fourth and most critical line of assurance for a Regulator is the bank’s Statutory Auditors.

13. Recognising the significant role auditors play, the Reserve Bank of India (RBI) has undertaken several initiatives to enhance the effectiveness of the auditing process. These include structured meeting mechanisms between supervisory teams and auditors, introducing exception reporting, streamlining processes for the appointment of auditors, and other measures designed to safeguard the independence of auditors. To facilitate better understanding, RBI has also put in place a system of sharing with the Institute of Chartered Accountants of India, the typical reasons for divergence between audited positions and RBI observations. Further, auditors have been given greater discretion to determine business coverage factoring in bank specific business and financial risks.

14. In this context, I would like to highlight five key expectations from auditors to help ensure robust financial oversight and regulatory compliance.

15. Firstly, auditors must apply due rigor in their audit processes to mitigate any potential for divergence, under-provisioning, or non-compliance with statutory and regulatory requirements. Further, a critical aspect of the auditor’s role is the careful evaluation of internal financial controls over financial reporting. By maintaining meticulous standards and adherence to regulatory guidelines as well as auditing standards, auditors can minimise the need for supervisors to intervene.

16. Secondly, as regulatory frameworks and accounting standards increasingly shift towards principles-based approaches, the role of auditors' judgment becomes increasingly critical. In executing their responsibilities, auditors must exercise prudent judgment, prioritising substance over form. This implies that auditors must go beyond mere technical compliance. Instead, they should discern the intent of the regulations and assess its application in practice so as to enhance the credibility of audit outcomes.

17. Thirdly, auditors can play a significant role in identifying and promptly reporting incipient vulnerabilities to both the bank management and the RBI. As you would be aware, a system of exception reporting has been implemented which requires reporting to RBI as soon as an issue of concern is observed. Early detection of risks such as operational inefficiencies, liquidity concerns, or evolving irregular market trends enables proactive management strategies and mitigation measures. This not only safeguards the bank's interests but also reinforces systemic resilience and enhances overall financial stability.

18. Fourthly, auditors should deploy competent staff equipped with the necessary training, skills, and experience, particularly in critical areas such as information technology (IT) and cyber security. In today's digital age, where cyber threats are increasingly sophisticated, auditors with specialized expertise are essential to assess and mitigate IT risks effectively. By ensuring audit teams are well-versed in emerging technologies and security protocols, auditors can contribute significantly to safeguarding sensitive financial data and maintaining robust cybersecurity frameworks.

19. Finally, and most importantly, upholding the highest standards of integrity, auditors must ensure there are no conflicts of interest that could compromise the objectivity and independence of their audits. Transparency and impartiality are of the utmost importance in fostering trust among stakeholders, including regulators, investors, and the public. Auditors must adhere strictly to professional ethics and guidelines to uphold their credibility and preserve the integrity of audit outcomes.

Conclusion

20. In closing, I would like to mention that today the banking sector is at a decadal high in terms of all financial parameters that we monitor, and the sector is well poised to support the growth of Indian economy. But we have a shared responsibility to ensure that the same is sustainable over the years. Therefore, today's conference underscores the indispensable partnership between the auditors, CFOs and financial sector regulators in safeguarding the integrity and stability of our financial institutions. Together, we must uphold the highest standards of transparency, diligence, and professionalism to foster trust among stakeholders and ensure the continued resilience of our banking system.

21. Keeping in tune with the theme of today’s conference, all of us—auditors, CFOs, and supervisors—should continue fostering collaboration and communication so that we move towards a future where our banking sector not only meets but exceeds expectations, setting new standards of excellence in governance and integrity.

22. With this I thank you for your participation at today’s conference. We look forward to listening from you at the interactive sessions scheduled later in the day.

I am delighted to be here today to convey my thoughts on the issue of statutory audit of commercial banks and AIFIs. In many ways, we, as Regulators/ Supervisors and you as Auditors, share a common goal. Auditors play a very crucial role in ensuring the health of the financial system as they assist in maintainance of regulatory oversight by ensuring that the financial statements present a true and fair picture of the affairs of the regulated entity. The statutory auditors play a significant role in maintaining stakeholder confidence in audited financial statements and this is particularly important in the case of banking industry where the entire edifice is built on ‘trust’ and the biggest external stakeholders, i.e., depositors are fragmented and unorganised. Therefore, the Reserve Bank has a strong interest in promoting sound and high quality accounting and disclosure standards for the banking and financial industry as well as in having transparent and comparable financial statements that strengthen market discipline.

Auditors are important stakeholders

Financial reports of an entity offer a window into its financial performance as well as risk profile and therefore, financial reporting is often referred to as the “language” for “communication” between an entity and its external stakeholders. The “communication” can be effective only if both the management and the stakeholders speak the same “language”. For this, we need a common language, in the form of a set of rules and principles, which is where the accounting standards come into play. Financial statements prepared on the basis of a set of common codified principles and standards reduce information asymmetry; enhance comparability and transparency between entities and across jurisdictions; and make the information provided through the financial reporting ecosystem relevant and reliable. The financial statements prepared in this manner help users and stakeholders to understand and assess the resource position of the entity, the claims held against these, the sources of changes in resources and claims, and timing and uncertainty of future cashflows which enables them to hold management to account in running the affairs of the entity concerned.

Regulators are important stakeholders in this process. The financial position of an entity informs into the regulator’s assessment of its health. Audited financial statements also form the basis for important elements of prudential regulations set by the Reserve Bank. The capital and leverage ratios, liquidity position, the computation of impairment and provisions, etc. rely on the accurate and transparent financial statements prepared by regulated entities. The financial statements can only be accurate when the accounting standards are correctly interpreted and consistently applied. The auditors are guardians who are expected to ensure the sanctity of this process. They are also the bridge between the management and stakeholders. They ensure that management’s judgement is sound and that the entity adheres to spirit of the accounting standards.

The interest of the regulator is not limited to fair and transparent representation of affairs in the entities regulated by it. Banks and financial institutions are also users of financial statements and to a large extent their well-being in linked to the entities which they lend to or invest in. Therefore, we are equally concerned with sound audit practices that result in high quality corporate reporting. We also monitor developments in the area of national and international accounting and auditing standard setting closely.

With these objectives in mind, we continue to work closely with the Institute of Chartered Accountants in India (ICAI) on accounting issues in the banking sector. In October 2001, the RBI had set up a Working Group under the Chairmanship of Shri N D Gupta, the then President of the ICAI, to identify gaps in compliance with accounting standards. Based on the recommendations of the Group, guidelines were issued to banks in March 2003 to ensure compliance with accounting standards. We had also worked closely with the industry and ICAI on the road map to moving towards adoption of Ind AS and had set up a Working Group to deal with Ind AS implementation issues in banks.

Role of auditors in a principle-based regulatory environment

The Reserve Bank, for some time now, has been supplementing rule-based regulations with principle-based regulations to give REs a degree of flexibility in their business decision making. This process has evolved with Indian financial sector achieving greater maturity. The principle-based regulations also embed an aspect of accounting that would reflect a move away from the prescriptive, rule based criteria to record transactions. Let me cite two recent examples.

The first guideline pertains to classification and valuation of the investment portfolio in banks. The revised norms, effective from April 1, 2024, largely align the guidelines on classification, valuation and operations of investment portfolio of banks with the global financial reporting framework. These norms require banks to classify the investment portfolio based on intention and objective of holding the financial asset (the business model) and the contractual cash flow characteristics of such assets. Further, the categorisation of an asset between banking book and trading book can have significant capital implications. These aspects shall require extensive use of management judgement. We expect the auditors to carefully understand the regulations and ensure that banks comply not only with regulations but also regulatory intent.

The second example is that of expected credit loss (ECL) based provisioning norms. This is a work-in-progress at this point in time. We have issued a Discussion Paper (DP) and an external working group was also set up to get independent inputs on the significant transitions involved. An important aspect of the proposed ECL framework is that, within the broad framework prescribed by RBI, banks can use different methodologies and models for estimating loan loss provisions. This will present an unique challenge to both regulators and auditors. As statutory auditors, you would be required to satisfy yourself that the bank is accurately computing such provisions and the models employed by the regulated entities are robust.

The principle based approach to regulations is founded on the belief that financial reporting reflects the economic reality of a transaction. However, application of principle-based standards requires significant use of management judgement. Sometimes, management may choose accounting estimates which may lack neutrality or freedom from bias. It is in this context that building greater rigor and skepticism into the audit becomes necessary. Doing that, however, may require special skills and it would be prudent to start working on building additional capacity to handle these changes and challenges.

In this connection, let me also share our experience with implementation of such principle-based guidelines in NBFCs with respect to Ind AS implementation. Our assessment shows that the flexibility offered by the principles-based standards, while valuable, has fallen short in some cases where their application is concerned. Let me highlight certain issues and challenges which we have encountered and which could have been evaluated by auditors more carefully.

• While the standards allow sale from assets under amortised cost category, an entity needs to assess how such sales are consistent with the objective of collecting contractual cash flows. In practice, we have observed that there have been significant sales from amortised cost category by way of securitisation and direct transfers. It is not clear how such sales are consistent with business model whose objective is to hold assets in order to collect contractual cash flows.
• Another example is how the impairment framework prescribed under Ind AS 109 is implemented. While the framework is forward looking and assessment of any significant increase in credit risk (SICR) for movement of assets from Stage 1 to Stage 2 is required to factor in more forward-looking criteria than just days-past-due (DPD), it has been observed that some NBFCs primarily rely on the 30 DPD criteria. DPD being a lagging indicator, is not always in sync with using the forward-looking approach of ECL.
• In case of Asset Reconstruction Companies (ARCs), it was observed that no provision was created for management fees and expenses which remained unrecoverable for more than 180 days. Such observations necessitated Reserve Bank to issue guidelines from a prudential perspective so that such unrealised management fees are deducted from regulatory capital while calculating capital adequacy ratios.

The instances highlighted above bring forth our concern of regulated entities using the flexibility offered in the principle based framework in a way that is not free from bias. We are of the view that such issues require greater levels of skepticism from the auditors. As independent assesors, auditors should critically evaluate and challenge management’s judgement and assumptions to ensure that the same are aligned with the underlying principles of the accounting standards and prudential norms.

A recent order by the National Financial Reporting Authority (NFRA) in case of an audit report of a non-banking financial company highlighted that the auditor did not perform the audit procedures to ensure the reasonability of ECL provisions. This is also a stark reminder of potential shortcomings in the auditing process.

Disclosure frameworks

The discussion regarding principle-based frameworks brings me to the second part of my remarks which is focused on disclosure frameworks.

It is said that with great power comes great responsibility. Let me rephrase this to - “With greater flexibility in accounting and prudential norms comes greater responsibility in disclosures.” Disclosures are the cornerstone of transparency. Clear disclosures bridge the gap between what management knows and what external users can infer from financial statements. But the moot question is, how much disclosure is 'good enough' to ensure a clear understanding without overwhelming users with information overload. Striking a balance between comprehensive disclosure and conciseness is a tight rope walk. When disclosures are clearand comprehensive, they foster trust in the market.

Again, let me share our experiences in this regard. We looked at disclosure being made by NBFCs in the context of ECL framework. On perusal of the disclosures of the accounting policies of some NBFCs, we observed that much of the disclosures were largely a repetition of the text of respective accounting standards. We could not glean any specific insights such as discussion of the assumptions and methods applied in measuring ECL, shared credit risk characteristics to assess expected loss on a collective basis, qualitative criteria in determination of SICR, etc.

To remedy this situation, we are nudging REs to enhance the quality of their disclosures. But I will also urge all present here as well as the larger auditor community to critically evaluate the disclosure practices and ensure that same meet the needs of accounting standards and end-users. Auditors also have the responsibility of ensuring that entities provide appropriate qualitative information related to governance and control mechanisms.

Emerging challenges and expectations

Moving on, let me now outline a few challenges and expectations going forward.

It merits repetition that it is the responsibility of the auditor to obtain sufficient audit evidence to assess the appropriateness of the use of the going concern concept. In this changing environment, the role of auditor must transcend from just verifying financial statements to holistically assess material risks being posed by the business operations and business model being pursued by the entity. In the past, we have seen examples where unsustainable business model of the entity ultimately led to its downfall. As Statutory Auditors, this is an emerging challenge which you need to consider and find ways to assimilate in your audit process.

A second emerging challenge pertains to climate and sustainability. With climate risks escalating and stakeholder scrutiny intensifying, robust sustainability reporting will no longer be a nicety but will become a necessity for financial and non-financial entities. The Reserve Bank has also issued draft regulations on disclosures in climate related risk. The complexity and diversity inherent in financial firms makes assessment of climate risk challenging and there is a vital role that the auditors can play in the process.

The third point which I would like to highlight pertains to increasing role of technology, particularly in the in banking and financial sector. Emerging technologies are altering the banking and financial landscape substantially. I am sure that even the way audit is being conducted is undergoing a transformation due to this technological revolution, Exponential growth in usage of digital channels to avail financial services has increased REs reliance on third party service providers and has exposed them to operational risks including cyber and outsourcing risks. In the changing environment, traditional substantive tests and procedures may not provide sufficient/ appropriate audit evidence. The auditors need to evaluate whether management is properly assessing the impact of emerging technologies on internal controls and on financial reporting. Again, the qualitative aspects related to vendor dependence, concentration as well as control mechanisms need specific attention of auditors.

For an audit to be effective, it should consider the needs and the expectations of users. These emerging issues highlight that the responsibilities of auditors have increased manifold and they should consider whether specialized skills are necessary to understand the design, implementation, and effectiveness of controls. Equally important is the ability and skills of the auditors to respond to these expectations so as to provide reasonable assurance and ultimately ensure a high-quality audit outcome.

Concluding thoughts

To conclude, let me say that even as banks navigate an increasingly complex emerging landscape, a harmonised approach by the regulators and auditors can remove the blind spots in risk identification and mitigation. This would help in achieving our shared goal of financial stability as well as ensure robustness of individual institutions. Therefore, there is need for deeper engagement and collaboration between regulators and auditors. This has also been emphasized in the Basel Core Principles for Effective Banking Supervision on ‘Financial Reporting and External Audit’ which encourages the supervisors (regulators) to periodically meet the external auditors to discuss issues of common interest relating to bank operations. I am aware that such discussions do take place during our supervisory process and we deeply value the contribution which auditors make during these discussions.

In the end let me acknowledge that external audit is an indispensable component of a robust regulatory framework. We look forward to closer collaboration to ensure the health, stability and integrity of our financial system.

Thank you. Namaskar.

 am happy to inaugurate the eighteenth Statistics Day Conference of the Reserve Bank. This annual event provides us with an opportunity to reflect on the current and evolving state of statistical system. It also helps us to take stock of the refinements in application of statistical methods and technologies in the realm of public policy.

2. The use of statistics has been ever growing as a preferred tool for drawing inferences in diverse fields. The discipline has moved beyond collection of facts to focusing more on interpretation and drawing inferences, taking into account the level of uncertainty. This shift has allowed statistics to become an integral part of other major disciplines. The surge in computing power is being increasingly harnessed in combination with statistical methods to improve efficiency in decision making and enrich end-user experience in various fields of human knowledge.

3. The celebration of the Statistics Day in India coincides with the birth anniversary of Professor Prasanta Chandra Mahalanobis. His contributions in laying the foundations of modern day official statistics in India have been pioneering. Inspired by his work, Indian statisticians are making their presence felt - both domestically and globally in traditional as well as in newer applications of statistics.

4. Against this backdrop, let me highlight the areas in which the Reserve Bank’s cutting edge information management is contributing to the formulation of public policies and the overall economic development in India. One year ago, we launched our next generation data warehouse, i.e., the Centralised Information Management System (CIMS) at the Statistics Day Conference. Several new features¹ were introduced in the new system². Scheduled commercial banks (SCBs), urban co-operative banks (UCBs) and non-banking financial companies (NBFCs) have already been onboarded for reporting on the new portal. The Reserve Bank has provided training to over 15,000 personnel from regulated entities. Many one-to-one handholding sessions have also been organised. I would like to congratulate the Department of Statistics and Information Management in the Reserve Bank for undertaking these initiatives. All regular statistical publications are now generated from the CIMS. Going forward, we intend to augment and refine the CIMS further as an integral part of our mission to constantly improve the quality of statistics. The new CIMS is also facilitating research on the Indian economy, minimising reporting burden, exploiting the technological advances and improving the experience of both data providers and users. In this endeavour, we have also benefitted from guidance by external experts. Our aspirational goal is to position information as a public good.

6. Looking ahead, the year 2025 has a special significance for compilation of official statistics the world over. Global efforts are expected to culminate in new global standards³ for compilation of macroeconomic statistics, especially for national accounts and balance of payments. Our team in the Reserve Bank is closely tracking these developments.

7. We are also making efforts to harness the availability of huge computing power and growing digital footprints to analyse measures of expectations, sentiment indicators and policy credibility measures from alternative data sources. Let me add that the use of alternative and unconventional data sources proved to be invaluable during the most severe phases of the COVID-19 related lockdowns and restrictions. In fact, their utility extends beyond periods of crisis. Data management systems need to keep pace with the use of unconventional data sources as policy inputs. While doing so, we have to be mindful of the importance of eliminating noise and capturing the signals from high frequency indicators. We are conscious that we are moving from an era of data scarcity to data abundance. The volume of digital data stored⁴ as well as the storage capacity⁵ are growing at an exponential pace, bringing forth new challenges along with new opportunities.

8. The focus now is naturally on enhancing capacity in artificial intelligence (AI) and machine learning (ML) techniques and analysing unstructured textual data. While doing so, ethical considerations need to be addressed and biases in algorithms need to be eliminated. In the Reserve Bank, we have ventured into AI/ML analytics in multiple areas. Under the Reserve Bank’s aspirational goals for RBI@100, we aim to develop cutting edge systems for high frequency and real-time data monitoring and analysis.

9. As Professor C.R.Rao, the legendary statistician, and close associate of Professor Mahalanobis had said: “Statistics is the science of learning from data. Today is the age of data revolution.”⁶ I am sure that our statisticians in the Reserve Bank will continue to strive for excellence and meet the emerging information and research needs of our economy in its journey towards even higher levels of development.

I wish all success for today’s deliberations.

Thank you.

¹ It incorporates various new age features like a data lake and integrated analytics with much higher processing speeds and scalability. Data lake is envisioned as a part of CIMS, which is more flexible than usual database systems, in terms of data fetching from multiple systems (inside and outside RBI), data storage (both structured and unstructured information) and data processing (standard and dynamic query based reports).

² The innovations implemented in the CIMS include: (a) to improve exchange of data and metadata, a Statistical Data and Metadata eXchange (SDMX) based repository has been implemented, which consists of the SDMX elements and related artefacts, undertakes data standardisation by aligning the elements with business concepts, and facilitates visualisation at desired level of granularity by drilling down elements; (b) a novel SDMX data conversion tool has been developed and implemented to generate SDMX time series from periodic data submitted by regulated entities; (c) all Regtech and Suptech data collection features have been implemented through creation of SDMX artefacts / metadata in server-to-server data transmission and data governance; (d) an advanced analytical platform to perform statistical analysis connecting cross domain data has been implemented with integrated programming interface; (e) an SDMX data query functionality provides interactive metadata driven search and data visualisation analytical platform for the general public; (f) power user capability known as common data platform has been implemented; and (g) functionality of regular information submission has been enriched with dashboards for regulated entities, system driven alerts and data submission monitoring utilities.

³ The new standards for national accounts and balance of payments statistics, coordinated by the United Nation's Intersecretariat Working Group on National Accounts (ISWGNA) and the International Monetary Fund (IMF) Committee on Balance of Payments Statistics (BOPCOM), respectively aim to meet boarder policy analysis and monitoring needs by integrating elements of social wellbeing and environmental sustainability; incorporating globalisation and innovation in real and financial sector operations; incorporating digital transformation; tracking climate change; steadiness between stock and flows; more detailed breakdowns; consistency with other standards; and developing new data sources and methods.

⁴ Moore's law

⁵ Kryder's law

⁶ Rao, B.L.S. Prakasa (2020). ‘C.R.Rao: A Life in Statistics’, Bhāvanā - The Mathematics Magazine.

Mr. V G Sekhar, Principal, CAB, Convenors of SLBCs, my colleagues from RBI, ladies and gentlemen. A very good afternoon to you all.

1. I am delighted to address you all today, the conveners of all our SLBCs. I understand that you all had a very purposeful engagement over these two days, dwelling upon various strategies and approaches that we plan to adopt in achieving our goal of strengthening credit delivery for an inclusive and sustainable growth. Having been once the Convenor for the SLBC in Telangana in my earlier role as a commercial banker, I can first-hand attest to the immense personal satisfaction it gives to make a difference in people’s lives through the SLBC forum. Indeed, over the years SLBCs have emerged as important instruments of change by catalysing synergies among stakeholders. Through the efforts made under the aegis of SLBCs across the country, commendable strides have been made in furthering the penetration of banking services to cover remote, unbanked and underbanked areas and to reach the marginalised sections of the population. More recently, SLBCs have spearheaded initiatives to promote digital payments, paving the way for all sections of the population to participate actively in the formal economy by facilitating financial transactions with ease and efficiency. These efforts have undoubtedly served to promote financial inclusion in various dimensions.

2. The topic of this conference ‘strengthening credit delivery for inclusive and sustainable growth’ is very relevant. Inclusive growth is crucial for several reasons. It helps reduce disparities in economic opportunities, employment and income levels across regions and population groups. When growth benefits everyone, it leads to broader well-being. A more inclusive economy promotes social stability and creates a sense of shared progress. Inclusive growth is in fact a sine qua non if we want to achieve our aspirations of becoming a developed country by 2047.

3. In this context, I would like to acknowledge and appreciate the leading role SLBCs play in providing solutions. Let me now enumerate some priorities that we may pursue with regard to inclusive growth.

Strides made in access, but work remains to be done on usage and quality

4. The Financial Inclusion Index developed by RBI measures the progress achieved in financial inclusion across the three dimensions of access, usage and quality of financial services. A review of the underlying parameters indicates that while several strides have been made in building access, much work remains to be done in improving usage and quality.

5. Let me explain this with an example. As per reporting by SLBCs, banking access has been provided to every village (or hamlet of 500 households in hilly areas) within a five km radius, barring a few. Data also indicates that it is the Business Correspondent (BC) model which has been leveraged in expanding such access. However, a recent survey undertaken by the Reserve Bank indicates that BCs largely provide only a limited set of services viz. cash-in/cash-out services and populations in far flung areas may still not have access to the full bouquet of banking services as would normally be available at bank branches.

Persisiting Credit gaps

6. Despite significant penetration of credit in India, there is still ample scope for reducing credit gaps that can promote economic inclusivity and development. While credit delivery to the priority sectors has indeed improved, we still have a long way to go to meet the credit needs of the MSMEs¹. Similarly, nearly half of Self-Help Groups (SHGs) still remain to be credit linked while a considerable section of small and marginal farmers are yet to be covered under bank credit². Addressing these credit gaps demands a multi-pronged effort in which SLBCs have a crucial role.

Expectations of SLBCs

7. I would like to cover four key areas where I believe SLBCs can make an immensely positive contribution.

(i) Effective coordination with Government and NGOs

8. Firstly, effective coordination with government agencies and non-governmental organisations is imperative. Being a collective forum, SLBCs must foster strong partnerships with various government bodies to align banking initiatives with developmental programs. This includes working closely with local administrations to ensure that banking services reach underserved regions, facilitating the implementation of government schemes, and addressing region-specific issues through collaborative efforts.

9. There is a need for sensitising the District administration on the scope of the Lead Bank Scheme and the role of banks under it. Besides this, staff at the operational level for both banks and government agencies associated with implementation of the Lead Bank Scheme must be aware of the latest developments and emerging opportunities. Better coordination can enhance the efficacy of financial inclusion initiatives and ensure that benefits trickle down to the grassroots level, thereby supporting the broader goal of inclusive growth.

(ii) Proper planning

10. My second point is about adopting a scientific approach to the preparation of annual credit plans. This is crucial. SLBCs should undertake detailed analyses to identify the root causes of the lack of growth in credit seen in certain jurisdictions. This involves using data analytics and field surveys to understand regional economic activities, local credit needs, and barriers to credit access. By pinpointing specific issues, whether they are related to infrastructure, borrower awareness, or banking processes, SLBCs can develop more targeted and effective credit plans. This approach will not only enhance credit flow but also ensure that it reaches the sectors and regions that need it the most, thereby supporting sustainable economic development.

11. Regular monitoring and evaluation should be integral to this planning process. By setting clear benchmarks and performance indicators, SLBCs can track progress and make necessary adjustments to their strategies. This iterative approach ensures that credit plans remain dynamic and responsive to changing economic conditions and local needs.

(iii) Leveraging technology

12. Thirdly, leveraging technology can be a game-changer in enhancing financial inclusion and credit delivery. SLBCs should promote the use of fintech solutions to streamline banking operations and improve customer service. Technologies such as mobile banking, tech driven customer support, and digital loan processing have significantly reduced turnaround times and increased accessibility. Additionally, deploying advanced data analytics can help in better risk assessment and credit scoring, thus facilitating more informed lending decisions. Embracing technological innovations will improve the efficiency of banking services, extend their reach to remote and underserved areas and make them affordable.

13. Digital loan processing platforms have revolutionised the way credit is being disbursed. These platforms have automated the entire loan application and approval process, making it faster and more efficient. By utilising machine learning algorithms, these platforms can assess the creditworthiness of applicants more accurately and fairly, ensuring that credit is extended to those who truly need it. This can be particularly impactful for both agri-loans as well as micro, small, and medium enterprises (MSMEs), which often face hurdles in accessing timely and adequate credit.

14. The Public Tech Platform for Frictionless Credit by the RBI Innovation Hub is one of the initiatives in this direction. It has an open architecture, open Application Programming Interfaces (APIs) and standards and operates in a plug and play model to which all financial sector players can connect. Recently, NABARD has collaborated with RBI Innovation Hub to integrate its e-KCC loan origination system with the Public Tech Platform with the potential to reduce the turnaround time for agri-loans from weeks to minutes. This is just one example of how technology can revolutionise this sector. I would encourage SLBCs to explore more avenues to look for innovative approaches to improve credit delivery.

15. The programme of expanding and deepening the digital payments ecosystem is being implemented across the country under the aegis of the SLBCs. As on March 31, 2024, 179 districts are 100 per cent digitally enabled. Under this programme, five states, namely, Kerala, Telangana, Andhra Pradesh, Tripura and Tamil Nadu have made all their districts fully digitally enabled. I hope that SLBCs of other states will also gear up and achieve 100 per cent digitalisation of all districts under their jurisdiction soon. In States where 100 per cent coverage has been achieved, the emphasis needs to be on monitoring usage of digital payment modes as well as on sustained efforts to promote digital financial literacy.

(iv) Financial Literacy

16. This brings me to my fourth and perhaps most important point which is on financial literacy, especially digital financial literacy. Despite the availability of digital banking services, a large section of the population remains hesitant or unaware of how to utilise these services effectively. Apart from basic financial services, SLBCs should also promote financial education programs that focus on the benefits and usage of digital banking. By enhancing digital financial literacy, SLBCs can empower individuals to manage their finances better, participate in the formal economy, and benefit from the full range of banking services available to them.

17. As you may be aware, today we have Centres for Financial Literacy (CFL) that cover nearly all blocks in the country. It is imperative that these centres, through their outreach to local communities and target segments, become conduits of tangible change, effectively bridging the gap between awareness and action. Therefore, at the SLBC level, monitoring should focus not merely on the number of camps conducted but on tangible outcomes, such as the number of beneficiaries linked with formal financial systems as a result of these financial awareness camps and programmes.

18. Emphasis should be placed on targeted awareness campaigns tailored to local conditions and needs to effectively spread financial literacy. This involves understanding the unique financial behaviours, needs, and challenges of different communities and designing educational content that resonates with them. For instance, in agricultural regions, financial literacy programs could focus on digital tools for agricultural financing, crop insurance, and efficient market linkages. By customising the approach to fit the local context, SLBCs can ensure that financial literacy initiatives are not only informative but also engaging and actionable.

RBI@100 goals

19. As we celebrate 90 years of the establishment of the Reserve Bank of India this year, we have also outlined our aspirational goals for RBI’s centenary, referred to as RBI@100. Among these goals are deepening financial inclusion and expanding credit availability.

20. Deepening financial inclusion is not merely about increasing the number of bank accounts but about ensuring that every individual has access to a comprehensive range of financial services tailored to their needs. This includes savings, credit, insurance, and investment products that can enhance their economic well-being. Expanding credit availability, particularly to underserved sectors such as micro, small and medium enterprises (MSMEs), agriculture, and marginalised communities, is crucial for fostering inclusive growth and sustainable development.

21. While these may appear as part of RBI@100 objectives, they are, in fact, the goals of every stakeholder in the financial ecosystem aligned with national interest. Achieving these aspirations requires a collective effort involving government agencies, non-governmental organisations, financial institutions, and the banking community. The role of SLBCs in this journey is pivotal, as they are the linchpin connecting various stakeholders and ensuring that the financial system works seamlessly at the grassroots level. I would therefore request your active cooperation and engagement in this mission.

Conclusion

22. In conclusion, the role of SLBCs in fostering inclusive and sustainable growth is both crucial and multifaceted. From enhancing financial literacy to leveraging technology, SLBCs can drive significant progress in bridging the gap between financial services and the underserved populations. By focusing on effective coordination with government and NGOs, adopting a scientific approach to credit planning, and emphasising digital financial literacy, SLBCs can create a more inclusive financial ecosystem.

23. As we move forward, it is essential to monitor and measure the tangible outcomes of our efforts, ensuring that the benefits of financial inclusion reach every corner of our country. By tailoring initiatives to local conditions and needs, and by fostering a culture of financial literacy, we can empower individuals to actively participate in the formal economy, thereby contributing to the broader goal of inclusive and sustainable economic development which are essential for a Viksit Bharat 2047.

24. I urge all stakeholders to continue working collaboratively, leveraging the strengths of each sector, and harnessing the power of technology to create a financially inclusive society. Together, we can build a resilient and prosperous future for all, ensuring that no one is left behind in our journey towards economic growth and development.

25. Thank you.

Deputy Governor Shri Swaminathan, Executive Directors, Chairmen of the Board and ACB of ARCs, MDs & CEOs of ARCs, my colleagues from RBI, ladies and gentlemen,

I am happy to be amidst you today to talk about the crucial topic of governance in ARCs. But before I address the issue of governance, let me briefly discuss the importance of credit risk management and the critical role envisaged for ARCs – both in terms of legislative intent and regulatory expectations, in India’s financial landscape.

Role of ARCs in the Stressed Asset Management

We all know that books of our financial institutions are largely susceptible to credit risk as loans and advances constitute a large proportion of the asset portfolio. The credit risk weighted assets (credit RWAs), in fact, constitute around 80 per cent of total RWAs of the banking system. Therefore, any prudential regulation to safeguard the stability of financial system must remain alive to the credit risk in the books of financial entities, banks and non-banks alike.

The credit life cycle involves four distinct stages. These include the stage of sourcing of credit proposal; appraisal and underwriting; disbursal and monitoring; and, finally repayment which then starts off the next iteration of the credit cycle. If, however, for some reason, the borrower does not pay the dues on time and a loan does not enter the fourth stage, there could be a problem. ARCs have been institutionalised to play a crucial role at this juncture. They are the institutions to enable loan originators to focus on their core function of lending by taking over stressed financial assets. The ARC framework is also designed to help borrowers revive their businesses, if possible. This in some ways is also intended to preserve the productive asset generated out of the loan.

Reconstructing distressed assets is by no means an easy task. ARCs are expected to step in, armed with expertise in recovery and reconstruction of ailing assets, and help reduce the level of non-performing assets in the banking system by taking possession of the secured asset of the borrower.

However, efficacy of all such endeavours hinges upon the bedrock of governance. So, in today’s address, let me dwell a bit on evolving regulatory framework for ARCs and why there is a need for robust governance structures for their transparent and effective functioning.

Regulatory Framework for ARCs

There are a few basic issues which regulations should seek to address for ARCs:

• First, ARCs should have sufficient resources to undertake asset reconstruction business.
• Second, the transactions have to be conducted in a transparent manner and on arm’s length basis.
• Third, the manner in which ARCs can resolve an asset needs to be clearly laid down.

All our regulations are built to address the concerns around these issues.

On the first issue of having adequate resources, let me emphasize that since the ARCs are in the business of asset reconstruction, they are expected to have both – resources and the required skin in the game. To ensure that they have strong and sufficient resource base, the requirements of net owned funds (NOF) was increased from Rs. 100 crore to Rs. 300 crore². Similarly, to ensure skin in the game, ARCs have been mandated to invest³ some amount in each class of SRs issued by them under each scheme on an ongoing basis, i.e., till the redemption.

On the second issue of transparency several regulatory requirements have been put in place. For example, the directions on Transfer of Loan Exposures (MD-TLE) provide for the checks in terms of price discovery of exposures, valuation of security receipts and transparent disclosure when assets are transferred by lenders to ARCs. In addition, taking over standard accounts from ARCs is subjected to specific conditions to avoid any transactions with malicious intent. Further, sharing of surplus from recovery of transferred exposures between the ARC and the lender is required to be made on a realisable basis.

Similarly, with a view to improve transparency, the revised framework has introduced a gamut of measures, including - (i) disclosures regarding the track record of returns generated for the security receipt (SR) holders in the offer document; (ii) increase in the disclosure period for the past performance of ARCs from 3 years to 5 years; and, (ii) disclosure of assumptions and rationale behind ratings of SRs to SR holders. These measures are expected to facilitate investments from a broader set of qualified buyers (QBs), address information asymmetry between the ARCs and SR holders, foster healthy competition among ARCs and nudge ARCs to focus on resolution of assets to achieve better returns for investors.

Third is the issue of resolution of the acquired assets. There is a regulatory framework in place, under the provisions of SARFAESI Act, which enables ARCs to undertake resolution. However, there are concerns around activities in this process chiefly relating to the ARC route becoming a vehicle for entry of the ‘tainted’ promoters, who in the first place were responsible for the default of the underlying entity. This aspect has become particularly relevant since the introduction of Section 29A in the Insolvency and Bankruptcy Code (IBC), which was specifically meant to keep out such promoters. However, often, entities meet this requirement by merely obtaining a declaration signed by the perspective buyer without undertaking any independent verification.

While the current regulations largely aim to address the three issues mentioned above, there are certain other areas which are engaging regulatory attention. One pertains to operational flexibility for debt aggregation. For instance, under extant guidelines, an ARC can acquire financial assets from another ARC but effectively the existing SR holders have to exit when the underlying financial assets are sold by one ARC to another ARC. In this context, there have been suggestions that a change in the trustee/ manager role from one ARC to another should be allowed, without necessarily extinguishing the SRs.

Moreover, for debt aggregation and better value realization, there is a demand that even the equity pertaining to the distressed company should be allowed to be sold by the lenders to ARCs along with debt. Further, in cases where ARCs are permitted to acquire equity and by extension ownership/ control of the borrower entities through various channels⁴ such as IBC or conversion of debt into equity, they should be allowed operational freedom to take decisions, including sale/lease of business.

We are examining these issues and are in touch with the industry to firm up our views.

Role of Governance

But there is a key area which is a point of concern for us as regulators, namely the governance in ARCs.

Sound and robust governance provides a strong foundation for the ARCs to build a robust business model. Governance, in this context, transcends mere regulatory compliance; it embodies a philosophy of accountability, transparency, and ethical conduct. In case of distressed assets, where conflicts of interest looms large and fiduciary duties are tested, effective governance can serve to develop confidence in the processes adopted by the ARCs.

Sound governance can also act as both a shield and a sword. It shields the stakeholders from conflicts of interest, ensuring that the decisions are guided by prudence and sound business sense. At the same time, it wields the sword of transparency and accountability by holding decision makers accountable for their actions and fostering a culture of ethical leadership.

To build a strong bedrock of governance, following conditions are critical:

1. A diverse and independent Board with effective oversight.
2. A robust risk management framework for identifying, assessing, and mitigating risks inherent in the portfolio of distressed assets.
3. Transparency regarding disclosure of information about the operations and decision-making processes and accounting practices.
4. Effective safeguards and robust policies to identify, disclose, and manage conflicts of interest in a fair and transparent manner.
5. A comprehensive code of conduct that outlines ethical principles, professional integrity, and accountability.

Sound governance in ARCs, therefore, requires a multifaceted approach that encompasses all the above elements. The onus in this regard lies largely with the Boards of the ARCs and the top functionaries who will have to develop a strong and robust institutional culture based on these principles. Without robust governance mechanisms, it would be a challenging task for ARCs to instil confidence in their operations and decision-making processes.

ARCs also need to be conscious of their conduct vis-à-vis the distressed borrowers. Even a single incident of misconduct can potentially snowball into a controversy which the sector should guard against. While we acknowledge the rights of the ARCs to recover overdue loans, they or their recovery agents should not resort to harassment of borrowers. A comprehensive fair practice code (FPC) for ARCs has been put in place which requires ARCs to follow transparent and non-discriminatory practices. This becomes that much more critical at present juncture when the share of retail loans in the financial assets acquired by the ARCs has increased (from 9%, as of March 31, 2020 to 16% as of March 31, 2023).

Way forward

As you are aware, the regulatory framework of ARCs was comprehensively reviewed by a Committee constituted by the Reserve Bank (Chair: Shri Sudarshan Sen). Based on these recommendations we have issued a set of revised instructions in October 2022 and they have also been subsequently incorporated in the comprehensive Master Directions on ARCs issued on April 24, 2024. These instructions are aimed at having a robust governance system in place. With a view to enable this and in order to enhance Board oversight, it has been stipulated that ARCs need to appoint an independent director as the Chair of the Board, and at least half of the directors in any Board meeting should be independent directors. ARCs are also required to constitute two committees of the Board viz., Audit Committee and Nomination and Remuneration Committee which are expected to enhance the efficacy of the Board and improve its focus on specific areas.

However, what we observe is that not all ARCs have implemented the revised guidelines on composition and functioning of the Board. I would take this opportunity to urge all ARCs to implement these guidelines in right spirit. Also, failure to meet regulatory guidelines and wilful violations would invite strict supervisory and enforcement action, if warranted.

Apart from the revision of ARC guidelines, the Reserve Bank has been undertaking several steps to create a vibrant market for credit risk transfer. The revised guidelines on transfer of loan exposures and securitisation of standard assets, credit default swaps (CDS) and formation of a secondary market loan association (SLMA) are some of the recent measures taken by the Reserve Bank towards this end.

The thrust of RBI regulations going forward is on developing a market for distressed assets by considering the inclusion of additional stakeholders with strong fundamentals and possessing expertise in resolution. This intention is reflected in the discussion paper on the Securitisation of Stressed Assets Framework. This is expected to increase competition among buyers of distressed assets, giving competitive advantage to the entities with superior resolution and recovery mechanisms capable of achieving optimal outcomes. Given their first mover advantage in this space, I feel ARCs are better placed to capitalize on this focus area and they should endeavour to explore options around this business segment in right earnest.

Concluding thoughts

To conclude, let me reiterate the fact that RBI regulations are intended to promote the integrity and effectiveness of the sector. As the leaders of the ARC sector, it should be your endeavour to ensure that the sector remains focused on course charted through legislative and regulatory intent and should ensure that any negative perception about the functioning and governance standards of the ARCs is dispelled.

To achieve that, it is important that ARCs have strong governance frameworks, robust internal controls, well developed risk management function, and strong compliance culture. As a regulator, our efforts would be to smoothen the operational difficulties and support the growth of the ecosystem for faster and efficient resolution of stressed assets. I am hopeful that ARCs would play the lead role in this process.

Thank you.