RBI may consider linking bank loans to repo rate
Mumbai: The Reserve Bank of India (RBI) is likely to consider linking lending rates to the repo rate, said Tarun Ramadorai, chairman of an RBI-constituted committee on household finances. In an interview, Ramadorai also said lack of inter-regulatory coordination is the biggest roadblock to implementing the committee’s recommendations. Edited excerpts:
Unlike the previous two committees on household finance, you examined the issue from the demand side. What did you find? Are Indian people stupid to be investing in gold and real estate?
I have an enormous amount of respect for traditional systems. Traditional systems usually come up in an environment when they are in optimal response to prevailing condition. I have an enormous amount of respect for an average Indian. I don’t think people are stupid or backward. They are optimizing in the face of an environment which they see. If an environment is good, it generates a certain outcome. If the environment has got market failures embedded in it, then it generates other outcomes. It’s not that demand side is silly but it’s responding to an institutional environment which needs to alter. The question is how does it alter? We have to remove the hassle factor from institutional loans. Changing the collateral registry, enforcing KYC (know your client) standards within banks so that you don’t have to push people to needless bureaucracy.
One of the big things that we come across in the report is that people experience a huge amount of pain from having to deal with bureaucratic institutions. People, especially at the bottom of the pyramid, when they deal with bureaucratic situations feel shame and embarrassment, feel inadequacies, can’t speak the language properly. They feel like people are looking down on them, they feel like financial products are products for the elite group. What we are saying is let’s depersonalize all of this. Massively leverage technology so that people don’t have to deal with that kind of stuff.
Are new institutions like small finance banks, more adaptable to technological innovations?
It doesn’t matter if you are a new player or established player. One of the biggest impediments to creating new technology is the fact that there is a huge regulatory uncertainty. Hence we suggested having what is called a regulatory sandbox and this should be a cross-regulatory initiative and it should be a safe space in which financial technology firms can experiment with temporary relaxation of rules with the view towards gathering evidence. Through this process, financial technology firms will develop the technology in the right way. The regulator gets comfort that this will do (well) for the market and in the process can later regulations as well. What also happens is that regulators will start coordinating with each other and cross functional products are allowed to get out there.
Regulators are behind the tech curve. What makes you think that a sandbox will even be understood by Indian financial sector regulators?
Capacity problem is a well-known problem. There are two ways to deal with the capacity problem. You either say regulator are behind the curve and let’s not create a new institution. In which case we have a status quo and we try to effect the change within the pre-existing system. This is an idea that has not worked. Our thought is if you create a dynamic new institution and populate it with people who are cutting edge within the organisation, then in some (cases) what you get is capacity building incrementally.
What are the biggest roadblocks to implementing your recommendations?
Inter- regulatory coordination is going to be tough. You need to have consistency of standards across different regulators.
One of the other reasons why we proposed a regulatory sandbox is that it is a way to get regulators to coordinate with each other. There are always going to be special interests that don’t like certain prescriptions. It was very hard initially when (former Securities and Exchange Board of India chairman Chandrasekhar Bhaskar) Bhave did the commission reduction (for mutual funds). It was universally excoriated.
But now growth in the mutual fund industry has been massive. One thing we have to ask ourselves is can we convince people in the long run that some of the measures we are advocating are beneficial even though there will be some short-run costs?
RBI and banks have not exactly won awards for their consumer focus. What makes you believe that a repo rate linked bank loan system will even be on the discussion table?
I think we are starting to see some changes. I think this repo rate linking plus immediate reset (of loans every month) plus immediate pass through is all going to happen. It’s all in the works. I think my committee report is going to be helpful in providing more evidence that this is going to be a useful thing and I hope we will be able to see this going forward.
What is the base result you hope to achieve with this report?
I’d like to see much more financialization of savings. Second, what I definitely want to see is an increase in the rate of pension and insurance take off in the country. Third one is a switch away from money lenders and so on which has been a stubbornly persistent problem towards institutionalized credit. There I think you can’t ban informal credit but also have to improve the provision of formal credit.
How do you expect institutions to go about executing these simplified financial products?
There is a role for the government. PMJDY was quite an interesting initiative and it has worked. There have been critics about account seeding. By and large it has introduced people into financial system and we should consider this a success.
We should piggyback on this initiative and should push other stuff. The government can’t do it on its own. It has to partner with private institutions to come out with these products. There has to be product innovation that the government encourages. The government is good at doing platform innovation. So they can create a PMJDY platform and other people can come and work on the platform. They can create an Aadhaar platform and other institutions can work on this. I think that’s what they should be thinking about—how do we create platforms that then private sector can come and capitalize on.