A tulip mania in crypto? Can't afford it, says Shaktikanta Das

“The way we look at crypto remains unchanged, irrespective of who does what," Reserve Bank of India (RBI) governor Shaktikanta Das stated at the 16th Mint Annual BFSI Summit and Awards in Mumbai on Thursday. “Just because somebody is doing something, we are not here to emulate them."

The US Securities and Exchange Commission (SEC) on Wednesday approved the first US-listed ETFs to track bitcoin, marking a milestone for the world’s largest cryptocurrency and the broader crypto industry. The SEC approved 11 applications, including from BlackRock, Fidelity and Invesco. At the same time, the SEC said it does not endorse or approve bitcoin.

“RBI’s position on cryptocurrency remains unchanged. Travelling down that path will create huge risks. I don’t think the world or emerging markets (EMs) can take a crypto mania like the tulip mania," Das said, referring to the 17th century boom and bust in Dutch tulip prices, regarded as one of the most infamous asset bubbles in history.

Delivering the keynote address at the event, Das pointed out that the US regulator itself has flagged the risks of cryptocurrency products. However, he noted that the blockchain technology, on which cryptocurrencies are built, has the potential to lend itself to many applications.

The governor has voiced his concerns on cryptocurrencies several times earlier as well, citing macroeconomic and financial stability risks. In June 2022, Das termed them a “clear danger", and said anything that derives value based on make-believe, “without any underlying", is just speculation under a sophisticated name.

The central bank has been focusing on strengthening governance and assurance in regulated entities, Das said. “The key is to identify risks early, monitor them closely and manage them effectively. In this context, instilling an appropriate risk culture in the organization is important." This needs to be driven by the board and senior management with effective accountability at all levels, Das said, adding RBI expects top officials and board members to play a more proactive role.

Speaking at a separate event on the same day, the governor said RBI is crafting a framework for securitization of stressed assets, for which it had issued a discussion paper in January, 2023. “We have received comments, they have been examined and now we are in our way to issue revise framework for Securitisation of stressed assets," Das said.

On another note, Das pointed to the exuberance building in unsecured lending.

“There was a FOMO or fear of missing out that was coming in; this was one opportunity that everyone thought they will capitalize," he said. “We saw banks and certain NBFCs did not have that kind of bandwidth of doing due diligence of loan proposals to justify the kind of loan growth that these sectors were seeing. It was very clear that this kind of growth would not be sustainable going forward, if it is not slightly moderated," Das said at the Mint event. Thus, the central bank pre-emptively acted before this could lead to a systemic risk, Das said.

In November, RBI raised the risk weights assigned to unsecured consumer credit like personal loans and credit card dues. This came after months of monitoring the situation and cautioning banks against going all-out in lending to these categories.

Meanwhile, banks and non-banking financial companies have taken to loan underwriting using algorithm-based models. The practice has come under RBI’s scanner. “The robustness of these models is something for the bank management and boards of directors and audit and risk-management committees to see," he said.

Another problem before RBI is the mushrooming of lending apps. RBI has created a list of apps that belong to or are allied with all licensed lenders to help identify the illicit ones.

“The responsibility is now more for the law enforcement agencies to identify the illegal apps," Das said. “Because we don’t regulate the apps. We regulate only the banks and NBFCs."

Speaking about RBI’s New Umbrella Entity (NUE) proposal that was supposed to pave the way for National Payments Corporation of India (NPCI) rivals, Das said that the proposals the RBI received lacked innovation.

“I think most of the proposals were just a replication of what NPCI was already doing. What we were looking for is some new innovative method, some value addition to our payments systems, which we did not see," he said.

Having said that, Das reserved the final word on NUE and said that the RBI will soon release its official view on the matter and make the necessary announcements.

However, Das stressed that unified payments interface (UPI) is “a digital public infrastructure and it is an open platform available to all." The payments highway needs to grow and collaboration with multiple other countries is on the cards, he said.