The Interim Budget for 2024-25, to be presented by Finance Minister Nirmala Sitharaman on February 1, is unlikely to be inflationary, Reserve Bank of India Governor Shaktikanta Das said.
While answering questions at the Mint BFSI Summit 2024 in Delhi on January 11, Governor Das said "going by the past track record, there is absolutely no reason to believe that any announcement in the budget would be inflationary".
“I don't have any inside information about what the government will do or what the finance ministry will do on the budget. But going by the past track record and going by the kind of measures the government has been taking in recent months....what comes out very clearly is that the government is very particular that inflation should be brought down and there is appreciation of the fact that supply-side measures can be done only by the government," Governor Das said.
After delivering the keynote address at the Mint BFSI Summit, Governor Das answered a few queries from Mint Editor Ravi Krishnan and members of the audience. Edited excerpts from the interaction.
Shaktikanta Das: At the moment, the Indian banking sector remains resilient and robust, even if you look at the unsecured consumer loans and some segments of personal loans. The numbers that we have before us are not particularly alarming. The numbers are within reasonable limits, and even the NPA numbers are also within reasonable limits, they have not severely, steeply, or significantly gone up. But, what came to our notice were two or three points. One, as I mentioned in my address, there was a kind of exuberance, which we clearly saw was building up, and a kind of a fear of missing out on what they call a FOMO approach, also getting in almost everybody, as this was one opportunity, which everybody thought they will capitalise.
Now, in the process, what was happening is that every institution, whether it's a bank or an NBFC, has a certain management bandwidth, to appraise proposals, to diligently examine a loan application, some of them have model-based lending, and there are models which automatically generate sanction letters, we saw that banks and certain NBFCs did not as per our supervisory assessment, have that kind of bandwidth of doing the due diligence of the loan proposals to justify the kind of loan growth in these sectors that was seen. And it was very clear that this kind of growth would not be sustainable going forward if it is not slightly moderated. So we clearly saw and anticipated some problems ahead of us, down the road. So, therefore, we call it that we acted preemptively. The approach is that as I said in the last monetary policy, we do not wait for the house to catch fire and then act, we would like to see where the fire is likely to be or is, and act in time so that there is no fire in the house.
Shaktikanta Das: It is for the banks to do it. I mean, how to do appraisal is not something which the regulators should be really telling the banks, each bank, each NBFC has its own internal capabilities. Because the banks ultimately, they're collecting depositors' money, they're lending that money, it is their responsibility. Our task is only from time to time, as the referee or as the coach, whatever you call it, our approach is from time to time, to tell that look, this is one area where perhaps you need to give us a second look.
For example, this model-based algorithm or model-based lending is one area where currently we are looking at, and I have said, it's not that I'm sharing any secret or anything, I mentioned it in one of the speeches about a month ago.
That this model-based lending also, the robustness of models, it is something for the bank management, and bank board of directors, and that includes NBFCs also, it is for the boards of directors, it is for the managements of these NBFCs and banks, and it is for the audit committees or the risk management committees of these financial entities to see how robust the algorithms and how robust are the models, as the ground realities keep on changing.
So, whether your model is falling behind the curve or it is in tune with the times, what are the possible risks which the models can create? So, that is one area which we are closely now studying, but again, our expectation is that the managements of the banks, the boards of banks and NBFCs, should themselves analyse and look at the possible riskiness or the possible gaps, which are there in their model-based algorithm-based lending, which can lead to a potential crisis.
Shaktikanta Das: That I think you will have to wait [laughs] I would not like to announce anything prematurely. Once we are ready with a particular analysis, we immediately issue it. And mostly, in many cases, we issue it as a draft circular and then finalise it. In certain situations, it's not possible to issue a draft circular, we have to straightaway issue the circular, it's situation-specific, but you have to wait. I would not like to make an announcement prematurely unless we are fully convinced that this is something and that this needs regulatory intervention.
Shaktikanta Das: We have, from all registered or licensed lenders with the RBI, the banks, and the NBFCs, we have collected the list of apps. And we have given it to the government, the Ministry of Information and Technology, which is uploaded on its website. Which are the apps utilised by the banks or as third-party service providers, that are engaged by the banks or NBFCs, that list is already out. Now, it's a long list. So what is necessary here is -- actually, the responsibility is more for the law enforcement agencies to look at and identify the illegal apps because our system, we get complaints from the public, or we try to, through the banks or the NBFCs, we have made the bank or the NBFCs, which engage this third-party service provider because we don't regulate the apps, we regulate only the banks and NBFCs. So we have cast the responsibility on our regulated entities to see that the fair code of conduct and the business track fair business practices are adopted by their third-party service providers.
But, the problem as you said is, with regard to the illegal lending apps, and there again, we have already furnished this list with the government and whenever we come across any further problem, we give it to the government and there is active engagement between the Reserve Bank and the ministries concerned and the Government of India and the law enforcement agencies. These coordination meetings are held regularly between these agencies to take appropriate measures against the illegal lending apps. And I think there is a growing consciousness, a growing awareness among the people, we have been doing a lot of media campaigns and awareness programmes to sensitise the public not to fall prey to any sort of apparently attractive-looking loan schemes or some other offerings.
Shaktikanta Das: No. For somebody who is doing business, it is for him to decide on his investment and his tolerance level, every business, whether it's a financial service, service sector company, manufacturing company, or any other real sector company, everyone cannot expect to see profit from day one. It is for those FinTech companies to identify, how much of initial loss or how many years of loss they can absorb. Also, it's a question they should be asking themselves, is the model adopted by them risky or likely to create loss and if it is something which is loss-making, it's a question they should answer themselves, whether they should travel down that lane, and at what speed.
So, therefore, so far as we are concerned, I would like to say that for the digital lending apps, we have not done anything, we have only put the responsibility on the bank managements to ensure that fair practices are followed by their lending apps. We have also sensitised the banks through our direct interaction that they must also look at these lending algorithms and model-based lending.
And as I mentioned, the digital lending guidelines have been issued after wide consultation. And that has been, I would like to say very clearly, that the digital lending guidelines have been well accepted. Look at FLDG, when we issued the digital lending guidelines, there was a lot of clamor that we should also recognise FLDG, first loss default guarantee, and at that time, we clearly said that it is under examination and we will consider it. Then we had extensive deliberations and consultations with the actual players and the percentage which we have prescribed is something which came from their side, and we examined it and we accepted it. Therefore, I think the FinTech sector is growing, it will grow. The FinTech sector, FinTech lending sector, and digital lending sector, it will grow, but it needs to grow in a sustainable manner. And that is our emphasis.
Shaktikanta Das: You see, now the NPCI is treated as our entire payment system. And within that, UPI is now treated as a digital public infrastructure. And it's open to any sort of, you know, the likes of the various apps, the Google Pay, the PhonePe, the Bhim app, any private entity can onboard into the UPI system and operate, so it is an open kind of platform. Of course, they have to apply to the NPCI and the NPCI has to give them the necessary permission and onboard them. So UPI has become a digital public infrastructure and it needs to grow.
UPI has become an international model to be emulated by other countries. In the recently concluded G20 under India's presidency, there was a wide appreciation and recognition of the fact that UPI is the leader in payment systems across the world. We are now discussing, both the RBI and the NPCI, we are in discussion with a number of countries to help them develop similar payment systems in their country and to integrate it with our UPI, already Singapore has done it and we have already signed an MoU with the Central Bank of the United Arab Emirates. There are a few other countries in our region with whom the discussions and the talks are in various advanced stages. We are ready from our side. Once they're ready, we would like to integrate them. So UPI is now positioned in a place where it is a public infrastructure. And it has to make its presence felt. Therefore, UPI needs to grow and that's the first aspect I will say.
I will not look at it as a monopoly because it's kind of, anybody can come and play with that, it's based on the principle of public-private partnership, and the success of UPI, in large measure, also owes a lot to the private sector payment players who have on-boarded into UPI. Many banks have their own apps, I'm not trying to pull down their role or anything, but I think the private sector companies have had a major role. So we want to position UPI as a digital public infrastructure, it's an open platform, it's available to all and that should grow, it is perhaps the best system and best in the world and it should become a world leader in facilitating similar payment systems in other countries and also in developing and improving the cross-border payments that we have.
Now, you are referring to the new umbrella entity, we got some proposals, there were many applications and we did not find anything new. I think most of the proposals were just replications of what the NPCI was already doing, what we were looking for was some new innovative method, some innovation, some value addition to our payment systems, which we did not see. But having said that, we will take an official view on this matter, this new umbrella entity thing, we will take an official view and then we will make the necessary announcements as and when we take the official view right.
Shaktikanta Das: I think the US capital market regulators, in that same announcement, as far as I know, they have also issued the necessary cautionary advice, and they have also issued a necessary warning to the investors to be careful, and they have also pointed about the riskiness of the whole thing. So, therefore, the capital market regulator in the US is fully aware of the risks that it poses.
Now, our position, my position or the Reserve Bank's position on this whole crypto thing remains unchanged, irrespective of who does what, just because somebody is doing something, we are not here to emulate them, we feel that, especially for emerging market economies, and I would say, the same would apply to advanced economies also, travelling down that path will create huge risks, which going forward, it will be very, very difficult to contain. The question arises, why do you need to travel down that road? What is it that you get out of it, the speculative nature of that product, which enables some people to make perhaps big money for some time, but the majority of the people are not going to make big money at all times. In fact, the majority of the people will encounter losses, because it's an entirely speculative product.
So therefore, I don't wish to comment on what another regulator of another country has done, because they know what is best for their country. And accordingly, they have acted, I have nothing to say on that. But I would like to say two things. Number one, they themselves, the US market regulators, the securities market regulators themselves have flagged the riskiness of the products and advised people to be very careful. Number two, I would like to say that we are all familiar with the term, the tulip mania in the Netherlands which built up into a big asset bubble and then it collapsed. So, I don't think the world, and in particular, the emerging market economies can afford cryptomania, which will lead to similar outcomes.
Shaktikanta Das: One-and-a-half lakh rupees to?
Q: We have the ATC provision.
Shaktikanta Das: Which provision? [audience member adds: income tax] Oh, ATC income tax, okay, I heard it as ATC, air traffic controls and I was wondering [laughs], okay so ATC Income Tax Act.
Q: So under that, sir, generally, if debt funds can be added to that, would that deepen the debt market?
Shaktikanta Das: I think it's a government tax issue. The budget is expected in less than 20 days. It's not fair for me to comment on that in public.
Shaktikanta Das: In wholesale, we started with the GSEC segment, both in the secondary market as well as in the primary auctions. Now, we are moving towards money market operations, we have talked about it, overnight money market operations, overnight call money market also, we are trying to onboard this, and we are trying to ensure CBDC utilisation in that area. And slowly, we will be adding new segments or new areas where we will do CBDC operations. Our whole approach is it is a pilot project, we are in no great hurry because after all, we are creating a new currency system and we have to be very careful about the integrity and safety of the CBDC we are creating. Therefore, we have been very careful, there is no target date as such, and we are moving very cautiously, but with the learnings that we are getting, we are trying to utilise and further finetune our system. So, in the wholesale segment, we will be expanding its scope, slowly and steadily.
Coming to retail, there have been many learnings. Now, for example, we are now working on the possibility of programmability in CBDCs. For example, the government cash transfers to farmers or other segments, whenever there is a direct benefit transfer or a cash transfer. So, you programme it in such a manner that the CBDC, which is transferred to the wallets of the beneficiary, it can be programmed; can it be programmed? we feel it can be, in a manner that it is utilised only for that purpose, where the end use is clearly defined by the person who is sending the money. So, that is one area where we are working.
Recently, we have made the UPI and the CBDC interoperable and you can use your UPI payment system, you can use the CBDC wallet also with the same QR code. So, slowly there are many learnings that are coming up, there are a few countries in the world which are in the pilot mode. And there is a lot of interest from other countries also in our CBDC system. So, I think the CBDC, in times to come, when it will happen I cannot say but I think it can happen sooner than we can believe at this stage, I think it's the future currency system and in particular, the CBDC will make cross-border payments much faster and much more efficient and less expensive, less costly.
Therefore, and I think again, for the CBDC we are using the blockchain, we will go for the DLT method, so therefore to the critics of the RBI's view on the cryptocurrency, let me say that we firmly believe that the technology of blockchain has its merits, it can be used and it is already being used by many companies even in India, the logistics providers, your maintenance of land registration records, there are huge opportunities available in blockchain technology per se, but the technology does not need a product called cryptocurrency to grow. So, we are using it, for example, in the CBDC, blockchain, we will be using the DLT model also. It's a huge opportunity, and that's going to be the future currency system, and we need to be there.
Shaktikanta Das: Now, this suggestion, this request has been coming to us from the mutual fund industry from time to time. We have just come out of the pressure on our currency which we witnessed in the aftermath of the starting of the Ukraine war. From February 2022 onwards, the rupee exchange rate was under a lot of pressure. Initially, there were a lot of outflows. So, it's a question of timing.
We don't question the basis of their request. It's a question of the right time for us to do it. We have just come out of the stress on our exchange rate of the rupee, and we experienced huge outflows. Now, things have stabilised and the rupee has remained very stable. Of course, some people read it wrongly and call it a stabilised arrangement, but it is not stabilised, it is market-determined, if somebody calls it as stabilised, so be it.
Now, I think the description of the exchange rate of the Indian rupee at the cost of slight digression, let me say, the description of the Indian rupee as a stabilised arrangement, I think, the fundamental strength of the Indian rupee, the fundamental points that have been missed out is number one, the strength of the macroeconomic fundamentals of the Indian economy, the strength of and the resilience of the Indian financial sector, the return of inflows into India. FDI inflows this year are less than what it was last year. But given that the global FDI volumes have gone down, and in that India's share is one of the bigger ones, so, I think these are the points which are being missed out. And also, I think, our exchange rate system, our economy is today, not what it was a few years ago, but that is beside the point.
Coming specifically to your question, I'm not questioning the genuineness of their demand. It's a question of timing when we feel confident that things are, it has to be stable on a durable basis, it is already stable. We will take the call at the right time.
Shaktikanta Das: Inflationary? No, it will not be. That is one thing I can tell you, I mean, I don't have any inside information about what the government will do or what the finance ministry will do on the budget. But going by the past track record and going by the kind of measures the government has been taking in recent months, right after the prices, inflation started and it hit 7.8 per cent.
After the beginning of the Ukraine war, the government has been taking a number of supply-side measures, particularly in recent weeks and months, and you see a number of supply-side measures being taken. What comes out very clearly is that the government is very particular that inflation should be brought down and there is appreciation of the fact that supply-side measures can be done only by the government.
The second thing is that our fiscal has not fuelled inflation in India, unlike in many other countries, where a huge amount of liquidity was injected into the system, it was already there, even pre-COVID it was there, but during COVID, the kind of huge liquidity that was injected, which is still sitting out there and circulating somewhere, that loose monetary policy injected and also fuelled the inflation. In India that did not happen, from the monetary policy side, our liquidity which we gave were for limited periods, which have come back to us. And we have also been pulling out liquidity on the fiscal side and the fiscal support which the government provided during the COVID times and thereafter was also targeted, and it was very calibrated. That did not fuel inflation. I have talked about it at length outside as well. So, going by the past track record, there is absolutely no reason to believe that any announcement in the budget would be inflationary.