INDIAS FI FINANCIAL SECTOR REFORMS 2010-2016: OU OUTCOM OMES AND - PowerPoint PPT Presentation

INDIA’S FI FINANCIAL SECTOR REFORMS 2010-2016: OU OUTCOM OMES AND IS AND ISSUES Rakesh Mohan Non Resident Senior Research Fellow Stanford Centre for Interna8onal Development, Stanford University and Dis8nguished Fellow Brookings India And Partha Ray Professor Indian Ins8tute of Management CalcuEa Presenta+on at the SCID India Conference 2016 Stanford June 2, 2016 1

Scheme of Presentation I. Macro Financial Condi8ons II. Central Bank Governance and Monetary Policy III. Developments in the Banking Sector IV. Forma8on of NPAs in the Banking Sector V. Financial Inclusion VI. Looking Ahead 2

Macro Financial Conditions (1) Growth and Inflation Outcomes Period (Averages) GDP Growth (%) WPI Inflation (%) 1951-60 3.6 1.2 1960-70 4.0 6.4 1970-80 2.9 9.0 1981-91 5.6 8.2 1991-92 (Crisis Year) 1.4 13.7 1992-2000 6.3 7.2 1998-2008 7.1 5.0 2003-08 8.7 5.5 2008-10 (NAFC) 7.0 5.6 2010-12 7.8 9.3 2013-16* 6.5* 3.2 (7.4) * Growth figures relate to GVA at basic price with 2011-12 base year. Figures in brackets are infla+on are on the basis of combined CPI Sources: Economic Survey, Government of India, 2015-16; RBI Bulle+n, 3

Macro Financial Conditions (2) Inflation in India Combined All Primary Fuel & Manufactured Year CPI Commodi8es Ar8cles Power Products Infla8on 2000-01 7.2 2.8 28.5 3.3 2001-02 3.6 3.6 8.9 1.8 2002-03 3.4 3.3 5.5 2.6 2003-04 5.5 4.3 6.4 5.7 2004-05 6.5 3.6 10.1 6.3 2005-06 4.4 4.3 13.5 2.4 2006-07 6.6 9.6 6.5 5.7 2007-08 4.7 8.3 0.0 4.8 2008-09 8.1 11.0 11.6 6.2 2009-10 3.8 12.7 -2.1 2.2 2010-11 9.6 17.7 12.3 5.7 2011-12 8.9 9.8 14.0 7.3 5.8 2012-13 7.4 9.8 10.3 5.4 10.1 2013-14 6.0 9.8 10.2 3.0 6.7 2014-15 2.0 3.0 -1.0 2.4 5.8 2015-16 -0.9 2.1 -8.3 -0.1 5.5 4

10.0 15.0 20.0 -5.0 0.0 5.0 Apr-05 Sep-05 Feb-06 Inflation in India: Different Rates Jul-06 Macro Financial Conditions (3) Dec-06 May-07 Oct-07 Mar-08 Aug-08 WPI Jan-09 Jun-09 Nov-09 CPI-IW Apr-10 Sep-10 Feb-11 CPI All-India Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 5

Macro Financial Conditions (4) Bank Credit & Investments: Growth Rates (%) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Investment in G-Sec Bank Credit Source: Handbook on the Indian Economy, RBI. Note: Figures refer to investment and credit of all commercial and co-opera+ve banks 6

Macro Financial Conditions (5) Credit, Investments, and Deposits of Commercial Banks (% of GDP) 7

Macro Financial Conditions (6) Payment System Indicators Volume (Million) Value (Rupees Billion) Type 2016 2010 2005 2016 2010 2005 1 RTGS 9.97 4.8 0.1 1,22,784 1,08,658 5,825 2 CCIL Operated Systems 0.3 0.1 0.1 75,012 34,827 7,290 3 Paper Clearing 98.1 13.18 – 7,717 102 – 4 Retail Electronic Clearing 328.3 37.1 4.8 11,136 1,657 80 5 Cards 917.4 44.8 15.5 2,573 103 29 o/w Credit Cards 72.8 23.4 11.8 230 70 24 o/w Debit Cards 844.6 21.4 3.6 2,342.82 33.57 4.67 6 Prepaid Payment Instruments 72.0 – – 59.72 – – 7 Mobile Banking 48.4 – – 625.01 – – 8 Number of ATMs (in actuals) 199,100 – – – – – Data pertain to March of the given years. Source: Database on Indian Economy, RBI 8

Macro Financial Conditions (7) What did the IMF FSAP report (2013) say? • Remarkable progress toward developing a stable financial system. • The prominent role of the state in the financial sector contributes to a build-up of fiscal conPngent liabiliPes and creates a risk of capital misallocaPon that may constrain economic growth(?) • Despite risks related to worsening bank asset quality and renewed pressures on systemic liquidity, financial system vulnerabiliPes appear manageable. • Sharp credit expansion with recent economic slowdown puWng pressure on banks’ asset quality, especially for infrastructure and priority sector (?). • Group concentraPons have reached troubling levels at some banks. • Risk of reversal of capital flows and a repeat of liquidity pressures like 2008. • Stress tests :banks’ substanPal buffers of high quality assets (cash and SLR Gsecs) enable them to deal with such pressures. 9

Scheme of Presentation I. Macro Financial Condi8ons II. Central Bank Governance and Monetary Policy III. Developments in the Banking Sector IV. Forma8on of NPAs in the Banking Sector V. Financial Inclusion VI. Looking Ahead 10

C entral Bank Governance and Monetary Policy (1) RBI Committees (1) Board for Fi Financial Supervision (BFS) ü ConsPtuted in 1994 as a commi_ee of the Central Board ü Obje jecPve: Undertake consolidated supervision of the financial sector comprising commercial banks, financial insPtuPons and non-banking finance companies. ü Memb mbers: 4 Independent Directors from the Central Board; All Deputy Governors ü Meets monthly Ø Can become me forma mally responsible for Fi Financial Stability and Macro prude prudenPal nPal RegulaPo gulaPon n 11

C entral Bank Governance and Monetary Policy (2) RBI Internal Committees (2) Board for RegulaPon and Supervision of Payme ment and Se_leme ment Systems ms (BPSS) ü Payment and Se_lement Systems Act, 2007 ü Sub-commi_ee of the Central Board of the Reserve Bank of India ü Highest policy making body on payment systems in the country. ü Empowered for authorizing, prescribing policies and seWng standards for regulaPng and supervising all the payment and se_lement systems in the country ü Assumes increased importance with spread of fintech 12

C entral Bank Governance and Monetary Policy (3) Financial Stability and Development Council (FSDC) (1) • FSDC set up by Government December 2010. • ObjecPves ü strengthening and insPtuPonalizing the mechanism for maintaining financial stability • Macro prudenPal supervision of the economy, including funcPoning of large financial conglomerates ü enhancing inter-regulatory coordinaPon and ü promoPng financial sector development • financial literacy and financial inclusion • ComposiPon ü Chairman: Finance Minister ü Vice Chairman : Governor RBI ü Members • Heads RBI, SEBI, PFRDA, IRDA • Finance Secretary and/or Secretary, Department of Economic Affairs, • Secretary, Department of Financial Services, and Chief Economic Adviser. • AddiPonal Secretary, DEA is the Secretary to FSDC • Financial Data Management Centre to be set up under FSDC ü integrated data aggregaPon for analysis in the financial sector. 13

C entral Bank Governance and Monetary Policy (4) Financial Stability and Development Council (FSDC) (2) • The FSDC Sub-commi mmi_ee : Chair Governor, RBI ü Meets more ohen than the full Council. ü Members: § All the members of the FSDC § All Deputy Governors of the RBI and AddiPonal Secretary, DEA, in charge of FSDC § ExecuPve Director, RBI (in charge of financial Stability) is the Member Secretary § Financial Stability Unit (FSU) of RBI is the Secretariat for the Sub-commi_ee. 14

C entral Bank Governance and Monetary Policy (5) Financial Stability and Development Council (FSDC) (3) • Working Groups/Technical Groups under FSDC Sub-Commi mmi_ee ü In Inter R er Regu egula lator ory T y Tech echnic ical Gr al Grou oup: headed by ED in charge of Financial Stability, RBI ü Technical Group on Fi Financial Inclusion and Fi Financial Literacy: Chaired by DG, RBI RepresentaPves from all regulators, DEA and DFS ü Inter Regulatory Forum m for mo monitoring Fi Financial Conglome merates: Headed by DG RepresentaPves of all the sectoral regulators ü Ea Early Warning Gro roup: chaired by DG, RBI in-charge of Financial Markets ü Macro Fi Financial and Monitoring Group: chaired by the Chief Economic Adviser ü Working Group on resoluPon regime me for fi financial insPtuPons 15

C entral Bank Governance and Monetary Policy (6) Changes in Operating Procedure: 2011 • OperaPng target of monetary policy: Weighted average overnight call money rate • Repo rate : Main policy rate • New Marginal Standing Facility (MSF) Banks: 100 basis points above the repo rate ü Banks can borrow up to 1 %of their respecPve NDTL; now 2 % • The Bank Rate aligned to the MSF rate. • The revised corridor was defined with a fixed width of 200 basis points. • The repo rate was placed in the middle of the corridor • Reverse repo rate 100 basis points below repo rate • More recently, on April 5 2016 with a view to “ensuring finer alignment of the weighted average call rate (WACR) with the repo rate”, the RBI narrowed the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points • Currently, Policy Repo rate = 6.5%, Reverse Repo Rate = 6%, & MSF Rate = 7% Ø Liquidity always expected to be in shortage 16

C entral Bank Governance and Monetary Policy( 7) Daily Net Injection (+)/Absorption (-) of Liquidity by the RBI (Rs. Billion) 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00 -500.00 -1,000.00 -1,500.00 Net Injec+on (+) / Absorp+on (-) = Repo + Term Repo + MSF + SLF + Open market purchase – Reverse repo – Term reverse repo –Open Market Sale Source: Database on Indian Economy 17

Central Bank Governance and Monetary Policy (8) Liquidity Adjustment Facility (LAF) Corridor and Call Rate 20 18 16 14 12 Per cent 10 8 6 4 2 0 Call Rate Reverse Repo Rate Repo Rate Note: Call rates touched 52-54 per cent on occasions during the period March 21-31, 2007. 18