RBI moving with caution, but need for courage led to easing of bank norm: Malhotra

Mumbai, Nov 7 (PTI) Governor Sanjay Malhotra on Friday made it clear that the Reserve Bank continues to move with "caution", but the need to "display courage" has led it to easing of norms governing banks' activities recently.

Speaking at an event organised by SBI, Malhotra also made it clear that the higher responsibilities placed on banks are on the back of better performance and improved governance, and added that the central bank possesses sufficient tools to reign-in any errant behaviour.

He also said that the RBI does not wish to micromanage, adding that no regulator can or should substitute for boardroom judgment and each case has to be looked at with merit by a regulated entity.

Last month, the RBI announced a raft of measures and intents, including those on allowing banks to fund domestic acquisitions, and foreign borrowings for real estate sector, among others.

Since assuming office, Malhotra has stressed on making it easier for doing business and also taking on board the cost of regulations before announcing any move.

"...while we move with caution, we need to display courage," Malhotra said, explaining the rationale beyond the moves.

Compromising financial stability while chasing short-term growth can extract costs through long term impact on growth, Malhotra said, adding that the central bank also needs to be conscious of the economic context and play a balancing act.

"Economic interest warrants increasing efficiency and promoting innovation, which also is the duty of RBI. We recognise that just like there are no free lunches, regulation to enhance stability too is not devoid of costs," he said.

The changes introduced are incremental in nature, and do not represent a sea change in the norms governing banks, Malhotra said.

"All these measures are balanced and appropriate, built on the bedrock of a banking system that has been systematically fortified over the last decade, with financial stability remaining the unwavering cornerstone of a policy architecture," the RBI governor said.

Quoting from Shakespeare's classic play Romeo and Juliet, the RBI governor hinted that the central bank would "go wisely and slow", as running fast may lead to stumbles. Flagging risks, Malhotra further said dangers are inherent in life and exist even in mundane activities.

The role of a regulator is akin to that of a gardener, Malhotra said, describing that a central bank also monitors the growth of a plant and prunes unwanted growth to "shape a collective, orderly, beautiful garden".

He added that the RBI has enough tools like changing the risk weights, tinkering the provision norms and put counter-cyclical buffers to contain any emerging risks, and the regulator displayed the same in November 2023 when it increased the riskweights on unsecured lending.

Additionally, the RBI can also deploy supervisory actions to moderate or prune unsustainable growth, he said, stressing that much of the moves have led to draft norms and the same will be finalised after taking on board all the feedback.

About easing of financing norms for banks, Malhotra said the acquisition finance move will benefit the real economy once implemented. He said there are guardrails like limiting bank funding to 70 per cent of deal value.

The liberalisation moves on external commercial borrowing come amid strengthening external sector and strong inflows, the governor said, calling it as a "natural step" in India's financial evolution.

He added that the RBI's projections are showing that the capital flows will remain "quite strong" even during the remainder of the fiscal year.

Clarifying on the move to allow real estate companies to borrow from abroad, Malhotra said the ECB is permitted only for projects compliant with foreign direct investment (FDI) norms, and will remain prohibited for any speculative activity or land buys.

The RBI is trying to make rule-making more open, more driven by data and evidence, after public consultation and assessing the impact of the move, he said. PTI AA HVA