First up, what is your expectation from the RBI board meet?
Four or five issues have been flagged off in the past and there are obviously different points of view but I am hoping that if not agreement, at least they can start the process of forming some committees. As you said, the liquidity in the economy is very tight, especially MSMEs and all are still struggling.
Over the last three years, the credit availability to MSME has been steadily going down and we need to address that. Fortunately inflation has come down and so holding high interest rates and holding very tight liquidity is no longer required. That plus the PCA framework for those 11 banks, there are quite a few issues out there. I am pretty sure some action will get initiated.
A lot of bankers say the PCA norms would perhaps be looked on a case-to-case basis and they definitely do need some relaxation. If this does come through, do you expect better credit growth for the NBFCs?
Yes, absolutely and you should remember that NBFCs are also providing credit to a large part of the economy. The more credit flows to NBFCs, they also onward will flow it out to the economy. And banks have cleaned up a lot of their NPAs. The provisioning cycle is almost coming to an end and fortunately we are at a stage when industrial investment demand is starting to come back.
But along with that. consumption is slowing down not only because of high oil prices in the last quarter but also high interest rates and very tight liquidity consumption is slowing down.
As you know, consumption has been the real engine for Indias growth. If we can ease off liquidity and make sure credit flow remains stronger after many years for the first half of this year, that would be good for consumption. The total system credit grew more than 14% for the first time. We should make sure that we at least have about 15-16% credit growth in the system to maintain the investment demand which is just starting to come out but also revive the consumption demand which has been the mainstay of Indian economy.
What assessment have you made of the liquidity situation for NBFCs? How much can the RBI do in addition to what they have already done with regards to liquidity?
Overall, the NBFC liquidity situation has improved quite a bit, Eight weeks ago, there was almost a crisis for confidence and things had frozen mainly as a result of IL&FS issue, IL&FS was not truly an NBFC, but since it was classified as an NBFC, there was this whole crisis of confidence which seems to have passed.
The liquidity for NBFCs is coming back to normal, commercial papers are happening, bonds are happening. I do not think providing liquidity to NBFCs is the currently a big issue but overall, liquidity in the system is still very tight. There are a lot of deposits that are flowing to banks because after this crisis of confidence a lot of funds came out of mutual funds and went to banks.
Now a lot of that are under PCA banks and unless they can lend aggressively, a lot of liquidity is getting stuck. Theres a good amount of liquidity but the flow of credit is not starting. We need to differentiate between the two and just overall liquidity is not important. When liquidity results in flow of credit, that is very important. Currently, credit flow is very constrained and RBI needs to increase liquidity a little bit and also look at the risk weightage for MSME credit, some more incentives for housing loans and others, so that we can kick start the frozen part of the credit flow. We should stop talking about liquidity and start talking about credit flow.
What are the other changes you hope the RBI would take?
RBI needs to revisit the NBFC framework because the last time this framework was structured was about 10-12 years ago. At that time, NBFCs were very small part of the overall credit flow. Now, NBFCs have become almost 30% of the incremental credit flow. They are almost 20-22% of the outstanding credit in the economy but more importantly for various parts like consumer durables, home loans and MSME credit, NBFCs are playing a much larger part in terms of delivering credit for all this.
We need to look at the framework, both on the risk weightages and the liability framework for NBFCs. We use the term NBFC loosely and there are many kinds of NBFCs. There are housing finance companies, asset financing companies, microfinance companies as well as retail NBFCs. There is need for a comprehensive framework and there is a need to make sure that the liquidity crisis in NBFCs does not occur.
Fortunately, eight weeks have gone and the NBFC industry has done very well. There has not been a single accident after IL&FS default, not even one small NBFC has defaulted which shows how strong the industry already is.
But a framework around this also ensures that NBFCs do not use that for industrial investments because we do not want NBFCs to be a conduit for industrial investment because that is what happened effectively in IL&FS. A lot of the NBFC money was invested in infrastructure projects.
Those are the rules we need to revisit and need to make sure that there is a robust framework for NBFCs which allows them to grow. They compliment the banking system. The banks and the NBFCs are two main providers of credit for the economy.
The other point of discussion today will be the RBI reserves. Chris Wood compared the balance sheet of the RBI to that of the Federal Reserve and says some checks and balances can be put in place. Do you think that that may happen?
Overall, we need to have some framework on what should be the reserve policy for RBI reserves and that also impacts the annual dividend they pay to the government because RBI dividend is an important source for the government which like any shareholder, expects some dividend payout.
So, overall we need a framework. It is a very technocratic exercise and for the reserve conversation, it is high time we move away from a very dogmatic approach that either this is right or that is right. Form a panel of experts. There are global experts, there are Indian experts and this is something that you can arrive at by applying a lot of rules and principles to see how other central banks have approached the reserve issue.
There are many models available and India is a unique country by itself but we need our own framework which is clearly articulated and which is clearly structured.
Going forward, for many, many years what reserves RBI should hold should be very clear. That will also be good for global investors because a episode like this creates the perception in peoples mind that the government is taking away reserves of RBI which is not really the fact. What the government is saying is let us create a framework, let us create an approach to say what is the minimum and the maximum amount of reserves RBI needs to hold to ensure financial stability to the country.