Shyamala Gopinath, deputy governor, the Reserve Bank of India, post spending almost four decades in the institution, is now looking forward to pursuing her interest in Carnatic music after retirement. She had joined the RBI as an officer in April 1972 and has worked in various capacities, including as executive director, until her elevation to the position of the deputy governor. She also served for two years (2001–2003) on deputation to the International Monetary Fund. Ms Gopinath, who retired on Monday, spoke to ET on her stint in Mint Street. Excerpts:
What are the challenges for RBI going forward?
You are right that RBI has to be braced to deal with the challenges that would come with the changes in the regulations, including new bank licences and the holding company structure. Clearly, the one challenge that RBI and the entire banking sector faces is that of human resource management. Developing skills and expertise to face these challenges is one area we need to focus. There is a need for more research in areas relating to finance and that is one reason why we have set up Centre for Advanced Financial Research and
Learning — or CAFRAL. While there is research done in the financial sector, mostly it revolves around how much we can liberalise further or how can we develop as an international finance sector. We have not really done any research on what kind of risk management systems our banks should have or what type of models suit to Indian conditions. For instance, many of the Basel models — whether it is for market risk or for credit risk — is very much based on the experience of developed worlds, particularly market risk. In order to adapt that system to our conditions, we need to do some research. The impact of market risk for our banks is really the effect of how the market works in India and they are not like that of other countries. Going forward, some of the areas do need more research, for instance, the impact of electronic money on monetary policy. Some of these issues need to be deliberated upon. Also one challenge we face is that there is better need for articulating the role of the central bank. There are certain perceptions surrounding the role of the central bank.
What according to you needs to be articulated better?
Our role as a macro-prudential supervisor and our role in the financial stability need to be articulated. Similarly, in the holding company case, it was mentioned in some paper that RBI wants to be the super regulator. The perception is not entirely correct. The suggestion made by the committee was that RBI should be the regulator for holding company. But we should understand why and in what context it was said. Initially, we were only planning a bank holding company structure. In that case, RBI would have been the regulator. But other regulators, who are also present on the committee, said that we should not only look at the bank holding company, but we should also look at the holding company as a financial holding company doing not just banking but also other financial services. Most of the concerns and issues surrounding the holding company come from the bank as one of the group entities. RBI also regulates non-banking finance company and the payment and settlements give a lot of stability issues where RBI has a major role and ultimately it is also the lender of last resort. So in that context, it was said that RBI can be the regulator and can create a unit within the bank and other regulators should also be a part of it.
What are the concerns in the non-banking finance sector?
There are several kinds of arbitrages. There are certain activities that banks can't do and NBFCs can, particularly like merger and acquisition financing. We are not worried about NBFCs doing it. What we are worried about is, banks' lending for these purposes that lead to indirect lending. Secondly, bank-owned NBFCs are doing activities which banks are permitted to do. For instance, giving retail and corporate loans. We have to devise a mechanism to deal with legacy cases. Some of the NBFCs are registered with the Securities Exchange Board of India (Sebi) as brokers, but they are also raising funds. There are some interconnections among funds raised by NBFCs regulated by us and those brokers. But Sebi regulations do not apply to them. So how do you ensure that Sebi regulations apply to them? Sebi and RBI would have to deal with these issues.
The government has announced that a separate debt management office would be set up. Have our markets developed enough to provide for an independent debt management office?
I don't know. First of all, if we understand what kind of market, we need to achieve sustainable growth. There are certain preconditions to be fulfilled before we think that markets can drive growth. If we think pure market economy can drive growth, I don't think that's true. I don't think anywhere in the world free markets have led growth. Free markets have only facilitated fund-raising and trading. But growth requires a specific macroeconomic environment. To clarify, by pure market economy, I mean a free entry and exit devoid of regulations in the forex market or government securities market.
Does RBI have any concerns relating to FCCBs redemptions that are coming up?
This amount has been factored in as debt. In fact, our approach is always to treat foreign currency convertible bonds and external commercial borrowing and debt. Realising this, corporates should have provided for it, but they didn't. It's entirely their problem.
RBI has been on top of the heap among global central banks when it came to handling the global crisis. Would this slow down the reform process?
Even in the midst of the crisis, we had not stopped reforms. Several measures were announced in 2009-10 like short-selling and separate trading of registered interest and principal securities (STRIPS). What we have continuously done is to build micro structures for all products so when it is introduced, we have the infrastructure in place. We allowed foreign participation in CDS, so we haven't stopped the reforms.
The RBI recently penalised select banks for violation of derivatives. Did your timing go wrong as the banks are still fighting a case in the Supreme Court?
Since the matter is subjudice, I would refrain from commenting.
What are the challenges you faced?
Every policy measures and reforms have been challenging. One can't work on a template. The most challenging events have been the Balance of Payment crisis of 1991 where the reserves were so low and demand was high. The whole period of the Asian crisis when the rupee was depreciating was also challenging. The whole market was one sided. We have a policy objective which the market does not have. A lot of credit goes to our top management for handling that situation. The global financial crisis was also a challenge. Here the vulnerability was not in terms of forex reserves, but we had to bring confidence as many of our corporates had borrowed overseas for acquisition.
Are you in favour of licensing new banks?
We need more competition in banking. We need more financial institutions but the issue is whether these new banks can promote financial inclusion or not. Financial inclusion and competition are two criteria the policy should address.
You have been with RBI for long. How has it been working with various governors?
Styles are different. They use various methods — traditional and non-traditional. For governor Reddy, one does not need to say anything, everything has been proven including his foresight. Mr Subbarao is a huge pillar for us, the way he handled the crisis. He put in place pre-emptive measures.
How autonomous is RBI?
RBI is autonomous in all forms. We cannot have legal autonomy. Even under FSDC, the autonomy of every regulator is ensured.
You have seen both the worlds of pre liberalisation and post. Can you sum it up?
Pre-1991, you can ask whether RBI had a major role because it was largely supporting governments in its fiscal management. We used to clear developments. We micromanaged banks and administered interest rate regime. This was needed at that time as we had very low reserves and a huge balance of payment deficit. Nobody was giving us money to address that deficit and then we entered into bilateral agreement with Russia and others. It was a different phase when development needs were enormous and the government could not raise revenues to fund those programmes. Therefore, the role of RBI was then to serve certain objectives which need not in the current context be appropriate for a central bank. But then, over a period, when it was possible we did change. Very soon we went to a market-related and auction-based borrowing. Whatever we did then was needed in that context or else we wouldn't have achieved what we did.
Your latest financial stability report reads like an instability report?
The objective of this is to put all the information in one report and for public to view. The likely risks posed for a national institution are articulated in the report. Some of them are based on certain models and stress test now whether that would happen or not is not clearly understood. This is being done world over. We do this for a better understanding of the risk and how we communicate this is, of course, an issue that is surrounding the financial stability. As you say, it reads like an instability report, we are not trying to say that there is no risk. Of course, we have said banks are adequately capitalised and have the resilience. But this has to be said after certain stress tests are conducted.
What would you like to do after you retire?
I really wanted to learn music — Carnatic music — not the classic aspect. I was more into devotional songs and various themes. Somehow, I've never been able to learn it.
Courtesy / Source : Economic Times
What are the challenges for RBI going forward?
You are right that RBI has to be braced to deal with the challenges that would come with the changes in the regulations, including new bank licences and the holding company structure. Clearly, the one challenge that RBI and the entire banking sector faces is that of human resource management. Developing skills and expertise to face these challenges is one area we need to focus. There is a need for more research in areas relating to finance and that is one reason why we have set up Centre for Advanced Financial Research and
Learning — or CAFRAL. While there is research done in the financial sector, mostly it revolves around how much we can liberalise further or how can we develop as an international finance sector. We have not really done any research on what kind of risk management systems our banks should have or what type of models suit to Indian conditions. For instance, many of the Basel models — whether it is for market risk or for credit risk — is very much based on the experience of developed worlds, particularly market risk. In order to adapt that system to our conditions, we need to do some research. The impact of market risk for our banks is really the effect of how the market works in India and they are not like that of other countries. Going forward, some of the areas do need more research, for instance, the impact of electronic money on monetary policy. Some of these issues need to be deliberated upon. Also one challenge we face is that there is better need for articulating the role of the central bank. There are certain perceptions surrounding the role of the central bank.
What according to you needs to be articulated better?
Our role as a macro-prudential supervisor and our role in the financial stability need to be articulated. Similarly, in the holding company case, it was mentioned in some paper that RBI wants to be the super regulator. The perception is not entirely correct. The suggestion made by the committee was that RBI should be the regulator for holding company. But we should understand why and in what context it was said. Initially, we were only planning a bank holding company structure. In that case, RBI would have been the regulator. But other regulators, who are also present on the committee, said that we should not only look at the bank holding company, but we should also look at the holding company as a financial holding company doing not just banking but also other financial services. Most of the concerns and issues surrounding the holding company come from the bank as one of the group entities. RBI also regulates non-banking finance company and the payment and settlements give a lot of stability issues where RBI has a major role and ultimately it is also the lender of last resort. So in that context, it was said that RBI can be the regulator and can create a unit within the bank and other regulators should also be a part of it.
There are several kinds of arbitrages. There are certain activities that banks can't do and NBFCs can, particularly like merger and acquisition financing. We are not worried about NBFCs doing it. What we are worried about is, banks' lending for these purposes that lead to indirect lending. Secondly, bank-owned NBFCs are doing activities which banks are permitted to do. For instance, giving retail and corporate loans. We have to devise a mechanism to deal with legacy cases. Some of the NBFCs are registered with the Securities Exchange Board of India (Sebi) as brokers, but they are also raising funds. There are some interconnections among funds raised by NBFCs regulated by us and those brokers. But Sebi regulations do not apply to them. So how do you ensure that Sebi regulations apply to them? Sebi and RBI would have to deal with these issues.
The government has announced that a separate debt management office would be set up. Have our markets developed enough to provide for an independent debt management office?
I don't know. First of all, if we understand what kind of market, we need to achieve sustainable growth. There are certain preconditions to be fulfilled before we think that markets can drive growth. If we think pure market economy can drive growth, I don't think that's true. I don't think anywhere in the world free markets have led growth. Free markets have only facilitated fund-raising and trading. But growth requires a specific macroeconomic environment. To clarify, by pure market economy, I mean a free entry and exit devoid of regulations in the forex market or government securities market.
This amount has been factored in as debt. In fact, our approach is always to treat foreign currency convertible bonds and external commercial borrowing and debt. Realising this, corporates should have provided for it, but they didn't. It's entirely their problem.
RBI has been on top of the heap among global central banks when it came to handling the global crisis. Would this slow down the reform process?
Even in the midst of the crisis, we had not stopped reforms. Several measures were announced in 2009-10 like short-selling and separate trading of registered interest and principal securities (STRIPS). What we have continuously done is to build micro structures for all products so when it is introduced, we have the infrastructure in place. We allowed foreign participation in CDS, so we haven't stopped the reforms.
The RBI recently penalised select banks for violation of derivatives. Did your timing go wrong as the banks are still fighting a case in the Supreme Court?
Since the matter is subjudice, I would refrain from commenting.
What are the challenges you faced?
Every policy measures and reforms have been challenging. One can't work on a template. The most challenging events have been the Balance of Payment crisis of 1991 where the reserves were so low and demand was high. The whole period of the Asian crisis when the rupee was depreciating was also challenging. The whole market was one sided. We have a policy objective which the market does not have. A lot of credit goes to our top management for handling that situation. The global financial crisis was also a challenge. Here the vulnerability was not in terms of forex reserves, but we had to bring confidence as many of our corporates had borrowed overseas for acquisition.
Are you in favour of licensing new banks?
We need more competition in banking. We need more financial institutions but the issue is whether these new banks can promote financial inclusion or not. Financial inclusion and competition are two criteria the policy should address.
You have been with RBI for long. How has it been working with various governors?
Styles are different. They use various methods — traditional and non-traditional. For governor Reddy, one does not need to say anything, everything has been proven including his foresight. Mr Subbarao is a huge pillar for us, the way he handled the crisis. He put in place pre-emptive measures.
RBI is autonomous in all forms. We cannot have legal autonomy. Even under FSDC, the autonomy of every regulator is ensured.
You have seen both the worlds of pre liberalisation and post. Can you sum it up?
Pre-1991, you can ask whether RBI had a major role because it was largely supporting governments in its fiscal management. We used to clear developments. We micromanaged banks and administered interest rate regime. This was needed at that time as we had very low reserves and a huge balance of payment deficit. Nobody was giving us money to address that deficit and then we entered into bilateral agreement with Russia and others. It was a different phase when development needs were enormous and the government could not raise revenues to fund those programmes. Therefore, the role of RBI was then to serve certain objectives which need not in the current context be appropriate for a central bank. But then, over a period, when it was possible we did change. Very soon we went to a market-related and auction-based borrowing. Whatever we did then was needed in that context or else we wouldn't have achieved what we did.
Your latest financial stability report reads like an instability report?
The objective of this is to put all the information in one report and for public to view. The likely risks posed for a national institution are articulated in the report. Some of them are based on certain models and stress test now whether that would happen or not is not clearly understood. This is being done world over. We do this for a better understanding of the risk and how we communicate this is, of course, an issue that is surrounding the financial stability. As you say, it reads like an instability report, we are not trying to say that there is no risk. Of course, we have said banks are adequately capitalised and have the resilience. But this has to be said after certain stress tests are conducted.
What would you like to do after you retire?
I really wanted to learn music — Carnatic music — not the classic aspect. I was more into devotional songs and various themes. Somehow, I've never been able to learn it.
Courtesy / Source : Economic Times
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