2024, a rear view: Mint Road balances continuity and change in governance

Mint Road saw a new incumbent at the helm, followed through on its regulatory and governance initiatives even as the wait continues on a few fronts

The 26th Governor walks in 

 

The suspense ended late on December 10 evening. Sanjay Malhotra, an Indian Administrative Service (IAS) officer belonging to the 1990 batch of Rajasthan cadre, was announced as the successor to Shaktikanta Das at Mint Road. The longest-serving Reserve Bank of India (RBI) governor since Benegal Rama Rau (July 1, 1949 to January 14, 1957), Das, after his six-year stint, was widely speculated to get an extension of at least two years. It was not to be.

 

In his first media interaction after taking charge, Malhotra hit the right notes.

 

Fostering economic growth, ensuring stability in policy making, and expanding financial inclusion would be among his key priorities. While significant progress has been made in financial inclusion, much more remains to be done, Malhotra said, stressing the importance of collaborating with all stakeholders in the financial system to further advance these efforts.

 

“Ours is still an economy that needs to develop as we enter ‘Amrit Kaal’ and to realise the vision of ‘Viksit Bharat’ by 2047. The huge responsibility we have in ensuring that the growth this country has, continues,” the new RBI governor said.

 

Meanwhile, the financial markets are already pinning hopes on a 25 basis points cut in repo rate in February next year. The key rate was raised to 6.5 per cent in February 2023 and has held its perch. GDP growth in the July-September quarter fell to a seven-quarter low of 5.4 per cent. And the central bank, in its recently concluded monetary policy meeting, also lowered its projection for economic growth in financial year 2025 to 6.6 per cent from 7.2 per cent earlier.

 

Malhotra also displayed his lighter side. On his first day in the office, he said, “It won’t be right for me to score on the first ball itself… It won’t be appropriate for me to start the first day with bouncers, googly, and yorkers.”

 

 Incidently, Sanjay Malhotra is the second person with the surname to hold the Governor’s post after Ram Narain Malhotra (4 February 1985 to 22 December 1990) who too was drawn from the IAS.

 

The SRO takes wings

 

The self-regulatory organisation (SRO) framework lifted off with Mint Road giving its nod to the Fintech Association for Consumer Empowerment (FACE). From all accounts, the SRO idea has caught the imagination of regulated entities (REs). There’s a crowd knocking at the banking regulators’ door. The Digital Lenders Association of India wants to be in, it will have FACE for company in the fintech space. Then you have The Finance Industry Development Council (a trade body of non-banking financial companies), the Business Correspondent Federation of India, and the National Urban Cooperative Finance and Development Corporation.

 

As for the Indian Banks’ Association, senior bankers are divided in their opinion on whether it should apply for SRO status. Not many are aware that Mint Road had asked the bankers’ lobby to weigh the SRO option way back in1998, (which Business Standard had reported on September 21, 1998).

 

The SRO architecture marks a major forward movement in the interface between the central bank and regulated entities. As former governor Shaktikanta Das put it in his October 6, 2023 Monetary Policy Statement, “SROs can play an important role in strengthening the compliance culture among their members and also provide a consultative platform for policy making”.

 

The SRO framework must be read along with the gains arising from the Regulatory Review Authority (RRA 2.0, November 2021). It incorporated the best practices from global central banks on consultation ahead of policy formulation, over 400 circulars were withdrawn. Short-point: 2024 saw RBI’s “open-door policy” to foster a better engagement of regulated entities with it getting a huge leg up.

 

Not a one-off

 

It came as a surprise when RBI informed private banks’ board secretariats of the second edition of its interface with their boards on November 18-- the theme this time around being ‘Transformative Governance through sound boards’.

 

The first with the boards of state-run and private banks on May 22 in New Delhi and May 29, 2023 in Mumbai, respectively was seen as a one-off, a novelty.

 

And how different was version 2.0? Well, it basically built on the ten-point charter outlined at last year’s ‘Conference for boards of banks’.

 

These included governance and stability, requisite qualifications and expertise in the board, objective and independent board, role of the chairperson, board committees, and top executives. Other aspects were corporate culture and value systems, quality of information, effective oversight of senior management, business model and conduct, integrity and transparency of financial statements, and independence of assurance functions: risk management, compliance, and internal audit.

 

What also came across is that Mint Road is making a qualitative shift in its interface with banks even on the supervisory side. As deputy governor Swaminathan J -- whose portfolio includes the powerful Department of Supervision-- noted in his address at the interaction (‘The board’s role in navigating transformation’), “… the Reserve Bank has been organising conferences of heads of assurance functions and is also asking for their presence at the supervisory meetings with banks. I would, therefore, encourage boards to build further on these initiatives”.

 

A few days later he followed it up by stating that the central bank is “dedicated to establishing a global model of risk-focused supervision, one that emphasises strong risk discovery and compliance culture” at the ‘High-level policy conference of central banks from the global south’. The message was read to mean: RBI’s senior supervisory managers will proactively dig for signs of mess in the banks they are assigned to.

 

Green taxonomy: the wait continues

 

When will we see a green taxonomy?

 

The Copernicus Climate Change Service has it that 2024 is the warmest year, going back to 1940. And estimated to be the second-warmest October globally, after October 2023 with average temperatures 1.65 degrees above the pre-industrial level. It also marked the 15th month in a 16-month period where average temperatures were above the 1.5 degrees threshold set by the Paris Agreement.

 

At Business Standard’s BFSI Insight Summit in Mumbai in December 2022, deputy governor M Rajeshwar Rao had said that “a formal definition of green finance along with a taxonomy is the need of hour as it would enable more precise tracking of finance flows to green sectors in India, which in turn, would help design effective policy, regulations and institutional mechanisms directed towards increasing both public and private investments”.

 

In November 2022, the Sovereign Green Bonds framework was finalised. The build-up on this front had been rapid. The RBI had come out with its ‘Survey on Climate Risk and Sustainable Finance in July 2022’, which was followed a month later by the Securities and Exchange Board of India’s reporting architecture on sustainable finance.

 

But two years on, we are very much in the same place as far a green taxonomy is concerned. Rao flagged the taxonomy aspect again at a conference organised by the Institute of South Asian Studies at The National University of Singapore last week. He referred to the gap in terms of availability of sectoral transition benchmarks that can be used by financial institutions to gauge the relative transition risks of the firms. And the absence of a definitive taxonomy at the national level “is also a constraint to determine which sectors need to transition along with an indicative road map for the same”.

 

The taxonomy is critical for going green to help the blue planet.

 

Will the door open at all?

 

The wait for new banking licenses continues. Four years after a Mint Road Internal Working Group (IWG) to ‘Review extant ownership guidelines and corporate structure for Indian private sector bank’ submitted its report (October 2020), there has been no forward movement.

 

It was speculated that the ruling dispensation at the Centre in its third term may give hints as to what is in store. The banking regulator has neither accepted nor rejected the proposal of an IWG that large corporate houses should be allowed to promote banks “only after necessary amendments” to the Banking Regulations Act (1949). But the RBI accepted 21 out of 33 recommendations of the IWG even as it offered no comment on the issue of granting banking licences to corporate houses.

 

The last time a follow-on comment came from the RBI on the issue (and the only occasion as well), was from deputy governor M Rajeshwar Rao (December 2021). “Banking is a highly leveraged business dealing with public money, it makes sense to keep industry/business and banking separate… Let me just say that the jury is still out on the issue,” Rao had said.

 

Need for a consumer advocacy body

 

The runaway growth in retail credit is slowly putting the spotlight on an issue which has not got the attention it deserves- - a body which can bat on behalf of consumers at the national level to offer guidance, mediate disputes, and promote awareness about responsible borrowing.

 

The new-to-credit segment and many in the rural and semi-urban lack conventional identity documents such as passport, PAN card, or driver’s license. They also may not be financially literate. In the post-pandemic phase, the RBI’s Financial Stability Report (June 2024) noted, “Financial liabilities of households have risen in the post-pandemic period, as reflected in the surge in retail loan growth for financing both consumption and investment.”

 

Interestingly, the Reserve Bank of India (RBI) in its Annual Report (FY24) said it plans to “conduct a survey to assess the reasons for the low level of complaints in the rural and semi urban areas”. 

 

The low level of grievances may be an indication that customers in these geographies may not be aware of the addressal mechanisms.

 

The report also said the central bank will review and roll out a reoriented nationwide intensive awareness programme based on feedback received from regulated entities (REs) and Offices of the RBI Ombudsmen, and further improve the complaint management system to enhance support in lodging complaints and ensure greater consistency in decisions and outcomes.

 

It also made mention of developing a consumer protection assessment matrix for REs; and strengthening the internal grievance redressal framework to encourage banks to take proactive measures to improve customer service.

 

On retail credit, a body on the lines of the All-India Bank Depositors’ Association, founded by the late MR Pai is the need of the times. Perhaps, RBI’s initiatives on consumer protection may lead to the setting up of such an entity.