Inaugural Address by Shri Shaktikanta Das, Governor, Reserve Bank of India at the Financial Express Modern BFSI Summit, Mumbai, July 19, 2024

Introduction:

In this address, the speaker reflects on the transformation and resilience of India’s financial sector amid global challenges. They emphasize India’s robust macroeconomic fundamentals and the financial sector’s pivotal role in achieving inclusive growth. Highlighting themes from the summit, such as “Decoding Inclusive Growth,” the speaker underscores the sector’s readiness to leverage technology, demographic advantages, and digitalization to propel growth. They also discuss the evolving market dynamics driven by technological innovations, changing consumer behaviours, and regulatory advancements. However, the speaker cautions against complacency, citing Walter Bagehot’s perspective on the importance of prudence in banking amidst evolving risks and opportunities.

Here’s a summarized breakdown of the key points covered in each section:

Loan and Deposit Growth:

• It emphasizes the importance of maintaining a balance between credit and deposit growth.
• Notes a current disparity where credit growth exceeds deposit growth, posing potential liquidity issues.
• Highlights a shift in consumer behaviour towards alternative investments like mutual funds, impacting traditional bank deposits.
• Discusses how banks are filling the credit-deposit gap with short-term borrowings, which increases sensitivity to interest rate changes.

Management of Liquidity and Interest Rate Risks:

• Reflects on recent banking crises in advanced economies, prompting global discussions on Basel III liquidity standards.
• Stresses the need for proactive liquidity management and correct valuation of liquid assets.
• Highlights the importance of managing interest rate risk effectively given the sensitivity of banks’ books to interest rate fluctuations.

Cybersecurity and IT Related Risks:

• It emphasizes the critical importance of cybersecurity in the digital era, given the increasing incidents of cyber-attacks.
• Highlights the Reserve Bank’s focus on enhancing IT governance and resilience of technology systems in financial institutions.
• Calls for continuous investment in technology and capabilities to address cybersecurity challenges effectively.

Digital Frauds:

• Addresses concerns over the rise in digital frauds, including social engineering attacks and the use of mule bank accounts.
• Urges banks to strengthen customer onboarding and transaction monitoring systems to combat such frauds effectively.
• Mentions collaborative efforts with law enforcement to enhance transaction monitoring and prevent digital frauds.

Third Party Risks:

• Discusses the necessity and risks associated with outsourcing functions to third parties in the current business environment.
• It highlights the importance of strong governance and oversight in managing third-party relationships.
• Refers to existing guidelines on IT outsourcing and draft directions on managing risks in outsourcing financial services.

Issues in Unsecured Retail Credit:

• Notes the increasing share of retail credit and measures taken to prevent excessive risk buildup.
• Highlights concerns over delinquency levels and excessive exposure in small ticket consumer loans.
• Emphasizes the need for prudence and risk management in setting limits on unsecured exposures.

Conduct Related Issues:

• Stresses the importance of fair conduct and responsible practices in fostering consumer confidence.
• Mentions regulatory efforts to ensure transparency in loan contracts and fair treatment of customers.
• Highlights ongoing concerns such as high interest rates in micro finance loans and the need for regulatory review.

Transition Financing:

• Discusses the growing threat of climate change and initiatives taken by the Reserve Bank to address climate-related risks.
• It highlights the role of regulated entities in promoting sustainability through initiatives like green bonds and climate finance.
• It also emphasizes the need for innovative transition financing models while managing associated risks and avoiding greenwashing.

Private Credit Markets:

• Notes the rapid growth of private credit markets as an alternative capital mobilization avenue.
• Acknowledges the economic benefits but cautions about vulnerabilities and interconnectedness posing financial stability concerns.
• It expresses vigilance towards developments in private credit markets and invites ideas for managing associated risks.

Conclusion:

The speaker underscores the pivotal role of banks and financial institutions, particularly those regulated by the Reserve Bank like Banks and NBFCs, in driving India’s economic advancement. They highlight these entities’ robust positions in terms of capital, asset quality, and profitability, positioning them to bolster economic acceleration. Emphasizing the imperative of embracing technology and innovation while maintaining stringent governance and risk management frameworks, the speaker advocates for sustained capacity building and resilience within the financial sector. They acknowledge past achievements but stress the ongoing need for continuous progress to effectively meet the evolving demands of India’s growing economy.