Mumbai: After a 39-year stint, Shyamala Gopinath, deputy governor of Reserve Bank of India (RBI), stepped down on Monday. In an interview, she spoke about her experience as a director on the State Bank of India (SBI) board, critical challenges faced by Indian banks and the monetary policy authority as it struggles to tame high inflation. Edited excerpts:
What has been your most challenging assignment at RBI?
I would say the most challenging time was 1991.
There was large-scale withdrawal of foreign deposits and our reserves came down... We saw the adverse impact of our too much dependence on short-term liabilities and understood the importance of having adequate foreign exchange reserves.
I was part of the team that dealt with IOC’s (Indian Oil Corp. Ltd) liabilities. IOC was ready to repay the foreign currency loans, but we did not have foreign exchange to provide for such a large outflow. So, we decided to crystallize all foreign currency liabilities of IOC into rupee liabilities. To do that, we needed to provide rupee fund to SBI.
You had a ringside view of the Lehman crisis.
Yes, that was also very challenging. We got wind of the fact that Lehman was going to file for bankruptcy the previous night and immediately we planned our contingency plan to deal with the situation.
Lehman had an NBFC (non-banking financial company), a securities company and a primary dealership arm and our first job was to ring-fence them.
What about the liquidity crisis that followed?
We had to provide some kind of backstop facility for banks to survive the crisis. Without that facility, there would have been problems and the backstop worked very well. We set up a swap facility for banks and that gave a lot of confidence to the international lenders.
Similarly, we rolled out lines of credit to financial institutions, apart from doing the monetary policy measures and making available a lot of liquidity to the financial institutions.
During that time both RBI and the government worked very closely. Can you recall any other occasion when RBI and finance ministry worked so closely?
In 1991, we worked very closely.
And now? We see some disconnect between the government and RBI.
Now also we are working very well, but working well doesn’t mean a consensus all the time.
So, you don’t see any major differences between RBI and the finance ministry? Hasn’t Financial Stability and Development Council (FSDC) undermined your autonomy?
In the case of FSDC, clearly our view was that the autonomy of the regulator should be maintained.
In your career, have you ever felt that RBI’s autonomy is being threatened?
Autonomy is something which cannot be demonstrated with action. There is no need for a legal autonomy, we really need a de facto autonomy. We are autonomous within the government. I wouldn’t really say that our autonomy was really affected ever.
You have not been able to control inflation despite successive rate hikes.
To manage the current inflation, both demand and supply side management is necessary. Here again, both the government and RBI have to work together. That is what (is) being attempted and even the government is trying to achieve that. RBI has to look at the situation from its point of view—the factors that are driving inflation, from where inflationary pressures are coming and act accordingly and we are doing that to contain inflationary expectations.
Do you feel helpless that monetary authority alone is fighting inflation and fiscal authority is not doing much?
I won’t say (we are) helpless. There are reasons why certain actions take time. Even monetary policy works with a lag. Similarly, increasing supply also may require some amount of time.
You have worked with past governors—Y.V. Reddy, Bimal Jalanand D. Subbarao. How do you describe your experience?
Jalan was fantastic in dealing with the Asian crisis in 1998. One of the main reasons that we could handle that crisis was that he was not wedded to any ideology. At that time, I remember, we came out with so many unorthodox measures—some of them were simply unheard of.
Reddy has been a real mentor. He used to have a great strategy for dealing with any problem. He was very clear that we have to reach some goals, achieve some objectives but he was always in favour of the non-disruptive way to achieve his objective.
Subbarao has been a pillar. He has tremendous wisdom and many measures that he took to deal with the liquidity crisis were also a little unorthodox. He has a brilliant scientific engineering mind.
Your strength has been regulation, supervision and inspection. How have they evolved?
We have modified our regulatory guidelines, the technology part and oversight systems to get data so that we are able to inspect banks better.
Are you a micromanager?
Our attempt has been to move away from micromanagement but when it is essential, I think we should not hesitate. Timely action is absolutely necessary even if it might appear as micromanagement.
There have been talks that big industrial houses might be allowed to set up new banks. Does RBI have the capability to regulate and supervise them?
I agree and I know what you are trying to say is that it is not easy to regulate and supervise such large industrial houses because they have operations all over the world and it is very difficult to have an oversight over these entities. But we will have to, in case we finally permit them (to set up banks), ensure that the banks set up by these companies have nothing to do with other operations of these entities. We have to build up a supervisory capacity.
We do not have such large supervisory capacity now. We will have to have such regulations that deal with such situations as well as the supervisory capacity.
You have come out with draft guidelines for holding companies. Is that a step towards such regulations?
Yes, we have suggested that irrespective of whether you are an industrial house or not, any entity that proposes to set up a bank, should do it through a holding company. That holding company will be regulated by RBI.
The inter-regulatory committee (that framed the draft guidelines) felt that it can be housed in RBI and we will also have officials from other regulatory agencies in that particular unit. The proposal has been that the holding company will be regulated not by the bank supervision and regulation department (of RBI) but by a separate unit.
You don’t allow NBFCs to raise deposits. You are also trying to stop flow of bank money to NBFCs. Do you want to close them?
I don’t think it should be interpreted that way. The issue is about non-bank entities and the kind of systemic risks they have. Initially, our focus was on deposit-taking NBFCs and, subsequently, we realized that the non-deposit taking NBFCs have rapidly grown with liabilities that they are sourcing from the public. It may not be direct public deposits, but indirect retail money is coming in. Even if money comes from mutual funds and banks, ultimately the lenders to these institutions are all individuals.
So, clearly, whether direct or indirect, any leverage, any liabilities being sourced in such a manner, needs some kind of regulation. We decided to have prudential norms for those who were above certain threshold. It’s not that we wanted to regulate all of them.
We are focusing our regulation only on the systemically important NBFCs. Earlier we did provide certain facility (to banks) to provide loans to NBFCs by treating such loans as priority sector loans but, over a period of time, we found in our inspection that some of the banks had not even done due diligence to find out whether these are actually priority sector loans or not. We are trying to correct that.
Your views on microfinance industry?
I remember that when microfinance institutions were set up and growing, we were advised against bringing in regulations at that time. The idea was don’t over-regulate or over-supervise; go for a light-touch regulation.
The regulations have been put in public domain, but we have to bring out the operational aspects and I think it will happen very soon.
You were RBI’s representative on the SBI board, but certain things that the bank had done, did not go down well with the regulator. Were you overruled or ineffective?
Let me clarify. I have seen three chairmen—(A.K.) Purwar, (O.P.) Bhatt and (Pratip) Chaudhuri. The bank has grown very positively. I think, one should not get totally blurred by certain aspects that have come into the public. During these years, there has been growth in their deposits, advances, market share, branches and ATMs.
I am there as one of the board members.
As regards the teaser loans, I would like to clarify that it’s not that all products come to the board. There is a lot of autonomy given to the bank management and products are entirely the decision of the management.
There is no board approval given to products. Second, the product was designed at the time of 2009 crisis, but we started calling it a teaser loan much later when we came to know that so many practices in the real estate industry were being fuelled by two-year fixed rate and then floating rate loan.
SBI had expanded its housing loans portfolio on the back of this product. Even when we framed prudential norms, we never asked the bank to stop teaser loans. We only asked for additional provision as some kind of a disincentive to make money costly for the borrowers. Again let’s understand. It was also not a long-term provisioning.
But you couldn’t convince the bank.
The bank did have a view. So did the other board members. Even if I’m on the board of the bank, if other directors feel they want to appeal to RBI, I cannot say “don’t appeal”. But as a deputy governor of RBI, I fully supported the central bank when it came to imposing of the provisioning norms on teaser loans.
SBI also issued guarantee to one Tatagroup company that RBI did not approve of.
That was the guarantee issue. They had interpreted the circular differently and had gone ahead with the transaction. I was not aware of this. I got to know when it came to the board for ratification. I did not agree, but by then the bank had issued the guarantee. The Reserve Bank’s aim is not to disrupt the whole thing—people purchased the bond based on the guarantee and so we did not force the bank to unwind that transaction. But we laid out the policy.
At a policy level, do you think, the regulator should not be on a bank’s board?
That is something we discussed in the past. This conflict of interest has been coming up again and again and when various Acts were amended, we wanted to modify the particular provision. The government modified this in case of other banks saying that RBI official need not be a nominee, it can be a person nominated by RBI. But, over a period we did feel that the RBI officials provide a lot of value in terms of expert advice and feedback.
From my own experience, I can say that there have been many issues that I, by virtue of being on the SBI board, have brought to the notice of the regulatory department in RBI based on which policies have been framed.
One of the areas RBI has possibly failed is the retailization of government bonds—it never took off.
Hardly in any country in the world does government bonds depend on retail investors’ buying—usually it’s done by mutual funds and institutional investors. Even in India, one of the reasons why retail investors are not interested is firstly they have the national savings scheme where they get fixed income and there is no market risk. If you want to sell government bonds, they are subject to market risk. The retail investors are more comfortable in getting a fixed income.
Have you given up on that?
No, we haven’t given up. But in India, there are other choices for retail investors, which are far more attractive. For instance, equity—there is no capital gain tax; no tax on dividend; it is far more attractive. Interest rates are not that attractive as far as government bonds are concerned and other bonds, say financial institutions’ bonds, are far more attractive because the rates are higher and the risk perception is low.
These are some of the reasons. But we have not given up. We are trying to develop a Web-based system, where any individual can apply for government bonds online in the primary auction.
Any other market reforms that are on the cards?
One thing is on the cards is CDS (credit default swaps) —we very much want it to be implemented—and the other one is interest rate futures (IRF). We have announced interest rate futures for 91-day T-bills (treasury bills), but we have not yet introduced it. The product is ready and the testing is being done. So I’m looking forward to the day when 91-day T-bill IRF is introduced on the exchanges.
For the two-year and five-year IRF, we have been working with Sebi (Securities and Exchange Board of India) and the exchanges to arrive at what could be the settlement price. Once we have comfort on that they could also be introduced.
What are the challenges for banks and Indian firms?
Indian banks have huge challenges in terms of human resources as a lot (of) officers are going to retire and the banks are suddenly faced with a situation when they have to adopt a lot of sophisticated systems on risk management, capital, managing non-performing assets, etc. Financing infrastructure is also a big challenge.
For the companies, there is a feeling that foreign currency borrowing is cheap just because interest rates are low. But if you fully hedge it, it is not going to be cheap. So very often, they keep their positions unhedged or only hedged partially. Currency risk is a real risk and it needs to be managed.
What’s the challenge for the regulator?
The challenge before the regulator includes dealing with inflation and ensure that growth is not impacted. We would want the long-term inflation to come down. The other challenge is to scale up the regulations on provisions not only on banks, but also on NBFCs.
What’s your retirement plans?
Frankly, I don’t have any assignment right now, but I certainly want to be in the system and definitely active.