RBI Taking A Closer Look At Bank Business Models: Governor Shaktikanta Das

The Reserve Bank of India is taking a closer look at business models and strategies of banks, said Governor Shaktikanta Das on Tuesday. The idea, Das said, is not to intervene in commercial decisions of lenders but to prevent any unforeseen build-up of risks.

Das also called on the board of directors at banks to challenge business decisions of managements, where necessary, to ensure they are in the best interests of depositors.

"Banks should ensure that their business models and business strategies are conscious choices, following a robust strategic discussion in the board, instead of being driven by mechanical ‘follow the market’ approach," Das said, speaking at the State Bank of India's Economic Conclave.

Banks should avoid herd mentality and look for differentiated business strategies, he added.

Das went on to stress the important role played by the board of directors of banks, saying that they are "guardians of the trust that depositors have reposed in a bank".

The regulator has high expectations from the oversight role of the board, he added.

The governor also flagged certain emerging concerns around the banking sector. Among these is the need to improve capital management processes at banks. "The key point is to envisage the capacity for loss absorption as an ongoing responsibility of the lending institutions. It is expected that banks will exhibit prudent risk-taking behaviour and use their capital efficiently."

Das added that restructured accounts would need to be monitored closely.

As support measures announced during the pandemic start unwinding, some of these restructured accounts might face solvency issues over the coming quarters, he said. "Prudence would warrant proactive recognition of such non-viable firms for pragmatic resolution measures."

Commenting on the economy, Das said that a gradual but uneven recovery is underway.

• The government is providing necessary support—especially through capital expenditure and reforms in various sectors like infrastructure, manufacturing and telecom.

• Private consumption is critical for inclusive, durable and balanced growth of our country. Daily-wage earners and workers at the lower rungs of the society have incurred significant losses of income and employment during the pandemic; that will take time to repair.

• Demand for work under MGNREGA remains higher than pre-Covid levels, suggesting that the recovery in informal sector is still to recover.

• A minimum tenure of contract for semi-skilled labour, especially in infrastructure sector, and linked to duration of projects may perhaps induce employment certainty and consumption.

Commenting on the role of public expenditure, Das said that good quality public expenditure will help crowd-in private investment and alleviate critical supply constraints. This can also ease inflationary pressures, he added.

He, however, called for greater focus on the quality of public expenditure and said that this can be weaved into fiscal consolidation road maps of the centre and states. It can give the current drive towards an investment-led recovery a further boost, Das said.

On Liquidity

In response to a question from State Bank of India Chairman Dinesh Khara, Das urged banks to ensure that risk pricing of loans is done diligently despite the prevailing surplus liquidity conditions.

According to Das:

• The mere availability of liquidity should not lead to mispricing of risk.

• Excessive liquidity is not going to be a permanent feature.

• The RBI is moving towards rebalancing of liquidity via variable rate reverse repo operations.

• Effort is to ensure that adequate liquidity for productive sectors of the economy. Slowly, we will rebalance liquidity so banks have adequate but not excess liquidity.