As Reserve Bank of India Governor Shaktikanta Das took the mic at a press conference on Friday, he faced a barrage of questions on the stability of the Indian financial sector.
Das, one of six members of Monetary Policy Committee, had just pegged down India's GDP growth forecast by an unprecedented 80 basis points from 6.9 percent to 6.1 percent. The committee had also voted to cut rates for a fifth time this year. However, the press conference that followed the MPC's decision was dominated not by concerns around the economy but by questions on the stability of the financial sector.
“The Indian banking sector remains sound and stable and there is no reason for any unnecessary panic,” said Das in response to a question regarding the recent troubles at Punjab and Maharashtra Cooperative Bank. His comment mirrored a rare statement issued by the RBI earlier this week, which sought to calm concerns about the health of the financial system.
Das repeated that assurance.
“Sometime unnecessary rumours can create a panic situation so through you, I would like to appeal to members of the public and all depositors, not to believe in such rumors. Our banking system remains sound and stable,” he said.
RBI Governor Shaktikanta Das assures that the Indian banking system remains sound and stable. #RBIPolicy
Read: https://t.co/VgbTugOuwb pic.twitter.com/u9s5wmXPX3While the deposit restrictions placed on PMC Bank are the latest spot of trouble to crop up in the financial sector, there have been other vulnerabilities that have cropped up in the last two years.
It started with a underreporting of bad loans in the banking sector, which prompted the RBI to conduct an asset quality review in 2015. Just as it looked like troubles in the scheduled commercial banks had bottomed out, unanticipated asset-liability mismatches hit non-bank financial companies. The collapse of Infrastructure Leasing and Financial Services last year left the credit markets shaken.
Since then, at least a few another NBFCs and housing finance companies have defaulted on dues. In some cases, such as Religare Finvest and IL&FS Financial Services, allegations of misgovernance have also emerged.
Das said the RBI would try and ensure that another systemically important NBFC does not fail.
“It's our endeavour to ensure that we do not encounter a failure of another large systemically important NBFC. With that objective, we are monitoring them closely. Whenever required, we have discussions with the management,” he said.
Fresh concerns have emerged due to the inter-linkages between the real estate sector and the financial system. Apart from direct bank exposure to real estate firms, NBFCs and investors in the bond markets too have exposure to the sector.
When asked whether the RBI had conducted a system-wide assessment of risks from the real estate sector to the financial system, Das said that the regulator looks at these risks as part of its financial stability report, but chose not to give an assessment of the extent of risk at the current juncture.
Even as the system continued to battle these NBFC worries, news of the deposit restrictions placed on PMC Bank emerged. Cooperative banks, while small, account for about 8 percent of deposits in the financial system, according to a Credit Suisse report released earlier this week.
Das, in his defence, said that one-off instances should not be extrapolated to the whole system.
“One incident cannot be and should not be used, we feel, to generalise about the health of the cooperative banking sector,” he said.But does the RBI's inability to catch cases like PMC Bank and instances of fraud, such as the one that hit Punjab National Bank in 2018, suggest deficiencies in its supervision function?
When asked, Das said that steps have been taken to strengthen the supervision department.
“The RBI has already announced the development of a supervisory cadre within the RBI, which would ensure that these functions are carried out in a more focused manner,” he added.
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