RBI Governor Says There Was Room For An ARC Funded By Banks

Reserve Bank of India Governor Shaktikanta Das said there was room for a strongly funded asset reconstruction company, as proposed by the public sector banks, that will focus on resolving a specific set of bad loans.

“The so-called bad bank is not really a bad bank but a new ARC to take over stressed assets from these banks and resolve them. It is targeting a specific set of bad assets held by public sector lenders. It will in no way jeopardise the activities of existing ARCs,” Das said while addressing members of the Bombay Chamber of Commerce and Industry at its 185th foundation day.

Public sector lenders together have proposed to create such an entity, which will purchase a specific set of stressed assets from banks as a way to resolve them in a timely manner.

BloombergQuint on Wednesday had reported that the proposed national ARC will look to buy assets with outstanding dues worth Rs 500 crore and above from public sector banks. A government guarantee is being considered for the security receipts to be issued by the nationalised ARC. A final decision, however, is still pending.

The RBI, Das said, had been proactively making provisions to fight the stress in the banking sector owing to the Covid-19 pandemic. The provision coverage ratio for scheduled commercial banks, he said, stands at 75%. That’s despite a freeze on classifying assets as non-performing since Aug. 31, owing to the Supreme Court’s interim order in the interest-on-interest case.

“The RBI has a clear idea about the quantum of bad assets where defaults have happened. We are in constant engagement with banks on the situation. The moment we see any weakness in the system we engage with banks and resolve it,” Das said.

Some other key highlights from Das’ interaction…

Central Bank Digital Currency

• The RBI to release broad guidelines on central bank digital currencies soon.
• Lots of work going on at the RBI on this. Don’t want to be left behind.
• “There are some issues we need to resolve, after which we will make announcements.”

Fuel Price Hike Impact On Inflation

• Need coordinated action on this and calibrated reduction in taxes.
• Central and state governments have their own revenue pressures owing to Covid stress.
• Having said that, the impact on inflation also needs to be considered.

Policy Response To Covid-19

• The RBI introduced long-term repo operations, targeted LTROs, special refinance and liquidity windows.
• Focus was to foster congenial financing conditions without jeopardising financial stability.
• Will continue to support the recovery process through the provision of ample liquidity in the system, while maintaining financial stability.

Impact Of Covid-19 On Trade And Balance Of Payments

• Merchandise trade has shown incipient signs of revival since end-2020.
• Recovery in services trade is yet to gain traction as subdued cross-border tourism and travel restrictions continue.
• Continued disruptions in global supply chains with steep increase in shipping costs since November 2020.
• These issues call for urgent attention from policymakers across the world.
• India’s oil import bill reduced by 42.5% during April-January 2020-21.
• Remittance inflows fell amid widespread job losses in host countries.
• Decline in remittances was more than offset by lower trade deficit and robust net exports of services.

Emerging Segments Of Growth Post Covid

• Manufacturing: Government's push toward strong manufacturing and infrastructure sectors and labour reforms will help in pushing this sector forward.
• MSME: Emergency Credit Line Guarantee Scheme, RBI measures to support this segment.
• Technology & Innovation: In the financial sector this could lead to higher financial inclusion, less information asymmetry and less risk.
• Health: India to lead the world in vaccine production and distribution. Need more corporate investments in the sector.
• Export Push: Domestic sector needs to develop its strength by focusing on quality and export competitiveness in order to remain viable in the long term.
• Free Trade Agreements: Post-Brexit scenario offers opportunities to develop separate agreements with the U.K. and the European Union. Africa also offers great opportunities to support higher exports and investments.
• Services Export: The World Trade Organization estimates a 2% annual increase in global trade growth by 2030. India, being the largest software exporting country, is expected to gain with increased servicification.