A day before Diwali, Duvvuri Subbarao, Reserve Bank of India Governor , signalled a ceasefire in the battle against inflation. After announcing a 25 basis point hike in the repo rate - the rate at which it lends to banks - the 13th in the past 18 months, he said while he expected inflation to moderate, the guidance should encourage investment decisions. In a late evening interview in his office, the 62-year-old Governor spoke to BT's Anand Adhikari and Rajiv Bhuva on issues facing the banking industry. Edited excerpts
On the impact of rate hikes on banks' asset portfolios
If you take the aggregate indicator, which is the gross non-performing assets, or NPAs , the estimate is fairly stable between June 2010 and June 2011. But that is only an aggregate indicator. I do recognise that at a time when growth is moderating and interest rates are also going up, the asset quality will come under pressure. It is quite possible that our banks will come under pressure. As much as that is something that we monitor and watch, I would think that there is no cause for concern about a rapid deterioration or very bad quality of assets.
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On the growing concentration of risk in banks' portfolios
The central bank has to be sensitive about being independent: Duvvuri Subbarao
There are guidelines and provisions in the regulations to manage exposure limits both for infrastructure and geographical concentration. So banks, I'm sure, take care of that and should there be overstepping of prudence, our supervisors will take care of that.On the accuracy of banks' evaluation by rating agencies
When such assessments come out and they are on the fly, there is a tendency to sensationalise them and not give the complete details which make it possible to make an evaluation. Take the case of a recent downgrade, which was only for a limited component (Moody's downgraded State Bank of India's perpetual bond issue in October). But it was written about as if it was an across the board downgrade. I think our analysts should give a more reasoned evaluation of the developments in the market.SPECIAL:
: The best banks in India On banks' funding needs
There is the Basel III package. That requires seven per cent common equity and 10.5 per cent for the counter cyclical buffer. At the moment our banking system more than meets that requirement. The question is how are we going to meet that requirement going forward? Since ours is a rapidly transforming economy, per unit of gross domestic product will require more credit than in the past. So the credit intensity of the economy will increase. So our banks will have to raise capital to meet the growing credit needs. How much capital each bank will need to raise will depend on how we calibrate this: Is the capital adequacy ratio going to be seven per cent common equity as required under Basel-III or is it going to be one per cent higher for Indian banks, as the norm is now? For example, the Basel requirement is eight per cent today but our requirement for banks is nine per cent. Should we say seven per cent or seven plus one per cent? Should we give time till 2019 or should we accelerate? It depends on all that. But the order and magnitude runs into hundreds of thousands of crore. I would not like to put out a precise number unless we have a more reliable estimate.MUST READ
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On the time-frame for lowering banks' reserve requirement
There is no time-frame except that it depends on the time-frame for fiscal consolidation.On the road map for the Indian banking sector
I'm talking about the RBI view. To assess our banking system on the basis of whether we have a globally competitive bank would be inappropriate. Our largest bank, State Bank of India, is today ranked at 57th position on some parameter by one institution. Global ranking and size is important for banks which have global operations. Our banks have a lot of work to do within the economy. So the need for them to explore global business is much lower. There is a lot of financial exclusion both in terms of area and coverage. Also, the credit demand of the economy is going to go up. The short point I'm trying to make is that we need not necessarily assess the strength of our banking system on whether we have a globally competitive bank. On whether we should have large, medium and small banks, our own view is that we need all of them to cater to all sorts of credit demands in the economy.On issues stalling the norms for conversion of foreign banks from the branch to a subsidiary model
Tax will be an issue when they shift from being a branch to a subsidiary. Also, we will not give them complete national treatment. What I mean is in terms of branch authorisation, in terms of priority sector obligations, because foreign banks have different sets of priority sector obligations.On the eligibility of large non-banking finance companies, or NBFCs, for banking licences
It varies from NBFC to NBFC. So, their experience as NBFCs will be one of the many criteria on which we will determine banking licences. Just because they might potentially be able to roll out faster will be one of the many considerations in determining their eligibility for a banking licence.
On RBI's mandate and autonomy
The central bank has to be sensitive about the importance of being independent. But we also have to make a realistic assessment of that. As I have said several times, RBI is a different type of central bank. We enjoy a much wider mandate than other central banks. We have a lot of social development obligations, and in that respect our interface with the government is much broader than that of other central banks. Therefore, autonomy and independence have to be measured in the context of the mandate of the central bank. But when it comes to monetary policy, the central bank has to have autonomy because that is good for the government, the system and for the economy.
Full transcript of the interview at www.businesstoday.in/subbarao