Shaktikanta Das, Governor, RBI, says in the Paytm case, Reserve Bank’s action is against a regulated entity. In this case, the regulated entity is a payment bank. RBI’s action is not against any fintech company. I do not see any reason why a narrative is building up or was built up as if the Reserve Bank has taken some measures against fintech companies. Fintech companies are not regulated by the Reserve Bank unless they are NBFC lenders. We have done nothing so far as fintechs are concerned. Fintechs are free to grow.
Das further says: “So far as Paytm is concerned, a large part of the users of the Paytm payment app, almost to the extent of about 80% to 85%, are linked to other banks along with Paytm Bank or to entirely different banks. Therefore, about 80% to 85% of the customers will not be impacted at all. The challenge is with regard to those 15% or 20% of the users who have linkage only with a bank account in the Paytm payment bank.”
In the case of Paytm, our channel view has been that the Reserve Bank of India has acted in public interest to safeguard public interest when it comes to Paytm. The framework was compromised and the Reserve Bank of India had no choice but to impose restrictions, that is one month old. After that, has Paytm taken corrective action? Have they earned the out of jail card? Could there be a review to that decision? Shaktikanta Das: No, I do not want to comment on a specific entity. It will not be proper. Now, for me to comment on a specific entity because there is correspondence going on between RBI and the regulated entity. In this case, it is Paytm which you have mentioned. So, specifics of where it stands, I would not like to mention. But since you mentioned Paytm, can I slightly expand the scope of my reply and bring in a few things which I think perhaps there would be interest among your viewers?First point I want to say is that the Reserve Bank’s action is against a regulated entity. In this case, the regulated entity is a payment bank. The Reserve Bank’s action is not against any fintech company. I fail to understand, I do not see any reason why a narrative is building up or was built up as if the Reserve Bank has taken some measures against fintech companies. We have not taken any action against any fintech companies.
Fintech companies are not regulated by the Reserve Bank unless they are NBFC lenders. If they are NBFC lenders, yes, they are regulated by us. In this case, the action is against a payment bank. Now, you may say that I am being defensive and all that. It is not being defensive at all. But I think I see this kind of narrative in certain sections of the media. But I think the financial sector players understand the situation very well. But for the understanding of the wider cross-section of your viewers, so therefore we have done nothing so far as fintechs are concerned. Fintechs are free to grow.
We are supporting fintech companies. We have set up an innovation hub. We have formed a fintech department. We have a regulatory sandbox. We are going towards forming SRO, a self-regulatory organisation for fintechs. RBI is and remains fully supportive of fintechs. I am saying this only to give a message to instill a sense of clarity in the minds of the people and on the fintech players, the RBI is all for fintech to grow. As far as RBI’s regulated entities are concerned, fintechs provide a third party service.
As a third party service provider, so far as we are concerned, we fix the responsibility on the bank or the NBFC which is utilising the services of fintech to follow the rules of the game, so that is one point which I wanted to clarify. And in the financial sector, when you come to a regulated environment, a regulated environment is a regulated environment.
There are regulations, there are rules of the game and you have to follow the rules of the game. If you want to drive a new fashionable car on the road, you have to follow the traffic rules. You cannot say that no, I am the owner of a new car and traffic rules do not apply to us. Traffic rules are for everybody. And why are traffic rules put in place? Because there are children crossing the road, there are elderly people using the road, there are two wheelers on the road, there are cars of various speeds on the road. Therefore, it is the responsibility of the traffic police to ensure that there are no accidents.
The Reserve Bank is similarly placed as a regulator which is entrusted with the responsibility of regulating a large part of the financial sector. Accidents can still happen, but our endeavour is to ensure that there are no major accidents. Therefore, we have now deepened our supervision to the extent that we are able to sort of anticipate problems and risk build up.
All our actions are determined with the objective of maintaining financial stability, protecting customers’ interest, protecting depositors’ interest and wherever we see a risk building up, we have to necessarily take action in the overall public interest. So, this is the overall background for all the regulatory actions which the Reserve Bank has taken not only in the case of Paytm, but in the case of a few other regulated entities. Whenever we take action, you have to see from where we are coming.
Just a follow up question for public awareness. Are you likely to extend the deadline of 15 March for Paytm Wallet just because of the kind of accounts and the pure size it has?
Shaktikanta Das: Initially, when we gave a time of about a month, 31st January, we issued these orders and we gave time up to the end of February which was February 29. We had made an assessment and our understanding was that it will take about 30 days for the whole thing to stabilise, then we issued a FAQ. As I mentioned in the Monetary Policy Day, we issued an FAQ, I think sometime around the 16th, in the middle of February.
Therefore, we thought that since the FAQ is being issued in the middle of February, giving clarity on a number of issues, number of questions which we had received. So, it is again appropriate to give one more month of time. In our assessment, the time given up to 15th March is sufficient because if you take into account the total number of users of Paytm. You are referring to the Paytm payment wallet, the payment app.
Now each payment app or wallet is linked to a bank account. Every payment app, whether your Paytm app or any other app or the wallet is linked to a bank account. So far as Paytm is concerned, a large part of the users of the Paytm payment app, almost to the extent of about 80% to 85%, are linked to other banks along with Paytm Bank or to entirely different banks.
Therefore, about 80% to 85% of the customers who are using the Paytm payment app will not be impacted at all because their app is also linked to another bank account of theirs. So, therefore, their payments can go on in a non-disruptive manner. The challenge is with regard to those 15% or 20% of the users who have linkage only with a bank account in the Paytm payment bank. There we have advised the company, that is the Paytm payment bank has been advised to sort of shift these customers to other banks.
Other banks are also proactively onboarding customers and NPCI has also been working closely with the various banks. So, customers are now sort of, who are exclusively dependent on payment bank – 15% to 20% of the customers – are getting onboarded to other banks. Therefore I do not foresee a problem beyond 15th March and through your channel I would like to say that if you have a Paytm payment app linked to only Paytm payment bank, please link it to another bank account of yours in some other bank.
But when do you think NPCI will take a decision on Paytm license?
Shaktikanta Das: I cannot say that. I know the process. NPCI has to do its internal due diligence. So far as RBI is concerned, we have informed them that we have no objection if NPCI considers that Paytm payment app can continue because our action was against the Paytm payment bank. So it is with the NPCI. So, our action was against the payment bank.. I would presume they will take a call shortly.
Coming to quote your last interview, you said that fintechs are like Ferrari. India still needs an efficient small car. Can I assume that now that SROs have been set up, RBI is essentially looking at extending the regulation in fintech? The soft touch is over?
Shaktikanta Das: If I can digress a little bit, you know, I think the Indian speed today is not like a small car. India’s economic growth and the way India is growing, it is the Tejas aircraft speed. But coming back specifically to this question, you said that…
Is the soft touch era over?
Shaktikanta Das: Yes, I mean, we do not want to slow down any economic growth. We do not want to slow down the growth of the financial sector. We are completely focused on the growth of a robust financial sector, the growth of the financial sector on a sustainable basis. You see, growth has to be sustainable in the long run. If you grow at a very high speed just for a few years and then there is a crash, that is not on.
As a regulator of the financial sector, it is our effort, it is our responsibility to ensure that the financial sector grows and grows with a good speed but in a sustainable manner. Therefore, in the recent years we have deepened our supervisory processes and approaches and we are now keeping a very close watch on activities of not only sectoral, sub-sectoral activities but also we are monitoring the activities of the individual banks or the individual NBFCs, the larger ones particularly, let us say, the top 100 NBFCs which control roughly about 80% to 90% of the NBFC space.
So, the monitoring, the supervision is now much more active. On the regulatory side, we have completely overhauled the regulatory architecture in the sense that for NBFCs, we have positioned a scale-based regulation. We have digital lending guidelines. We have issued ownership guidelines as well as governance guidelines for scheduled commercial banks. So, therefore, we have brought in a lot of changes in the regulatory side to ensure that our financial sector remains strong and healthy and on the supervision side also, we have deepened our supervision to the extent that we constantly monitor what is happening both through off-site as well as on-site methods including a lot of online information which we get to ensure that the Indian financial sector again, as I mentioned, remains strong and healthy and grows in a sustainable manner.
But looking at AI, better compliance, can I say that compliance now will occupy centrestage and Reserve Bank of India, in a sense, could revisit the total penalty which is there in the system which minuscule considering the global standards for non-compliance?
Shaktikanta Das: Three principles which we highlight, you can call them the tripod of stability in any financial institution. The tripod of stability is management of risk, ensuring good compliance, ensuring reasonable compliance and the third aspect is taking the internal audit seriously, making the internal audit functions efficient. That is why as a part of our governance reforms in banks and NBFCs, we have mandated creation of dedicated senior level positions of chief risk officer to look after risk management, chief risk officer, chief compliance officer and the head of internal audit. In all these three functions, we have spelt out what are the areas they should be looking at. We have mandated that there should be sufficient senior officers having the required capability. Ultimately compliance is an essential part of good governance and from the Reserve Bank, we are giving a lot of emphasis on these three things, risk management, compliance and the findings of the internal audit, how they are being addressed.
Savings Vs Stock Market
There is a war of liability within banks right now and banks in a sense are making a case that look, we are not getting traditional savings because a lot of money is being channelised to stock markets. As RBI is, what is your view? Are savings diverted into stock markets?
Shaktikanta Das: The whole position is slightly nuanced. If savings are going into stock markets, it is coming back to banks. Let us say if I am buying some shares in the secondary market or I participate in an IPO, I make the payment, but where does that money go? It does not remain as loose cash. It comes back to the banking system in somebody else’s bank account. Therefore, from the point of view of the banks, one set of deposits, one set of depositors probably, their deposit rates are coming down in another category of deposit. The money is shifting from one account to the other account.
But having said that, the broader point which you are making and which I quite agree with is that the growth rate of deposits is in the order of about 12%, whereas credit is growing at about 16% to 17%. So, there is a kind of a mismatch. There will always be a mismatch, because it is not that you get Rs 100 by deposit and the same 100 alone will be given out as loan and out of that 100, incidentally, the bank has to provide for CRR and SLR and other requirements.
But when one loan gets sanctioned, money creates money, what is called the money multiplier. Therefore, you cannot say that credit cannot grow at a rate higher than the deposit growth. It will always grow at a rate higher than the deposit growth. But there has to be some correlation between credit growth and deposit growth. Now, the deposits growth is in the region of about 12% to 13% and historically, the deposits have grown around 13-14%. So, yes, to some extent, there has been some dip in deposits, perhaps because I think the propensity to spend more is now there.
Consumption expenditure is, picking up. But eventually that money comes back again to somebody else’s bank account. So, as economic growth takes greater foothold, I think one can expect the savings rate to improve. If retail savings are not growing, it is perhaps because of things like investment in mutual funds, investment in shares or greater amount of spending which is undertaken by the households.
But is RBI worried about the kind of options activity which are there in the system, loan against securities? Is that a bit of a fly in the ointment? Is it a concern?
Shaktikanta Das: As for loans against securities, the RBI has given guidelines to banks and NBFCs also. Even with regard to NBFCs financing IPOs, two years ago we came out with some guidelines. Earlier the NBFCs could give any amount of loan with regard to IPO financing. But we have set a limit of Rs 1 crore per borrower. Therefore, that is one area where we are constantly monitoring. As and when some action is required, we will take them. At the moment, it is under our surveillance. I do not want to add anything more.
What about real estate? In the past, RBI has flagged off concerns in the real estate sector in the previous cycle, they have taken pre-emptive measures. Where do you see the real estate sector is headed? Are you worried?
Shaktikanta Das: At the moment, I am not unduly concerned about real estate sector as a whole. Construction activity continues to be strong and the real estate number may look high because of the fact that the HDFC’s assets got merged with the HDFC Bank. So, both put together if you compare year-on-year basis, the real estate sector growth looks high. But if you net out the HDFC component, then the growth of the real estate sector is not something which worries us at this point of time.
Coming to bond inclusion. India will be part of MSCI Index. Bond inflows will pick up. How is RBI preparing the bond market for the inflows?
Shaktikanta Das: Bond market inclusion can act as a double-edged weapon. If there are inflows, there can be situations where there are outflows also and that can cause volatility in the yields. But if you are alluding to the expectation of heavy inflows, I would like to say that so far as the JPMorgan bond index inclusion or yesterday’s announcement by Bloomberg is concerned (it is about a year away from that). But these will come in over a period of time. They are not going to come in one shot.
They will come over a period of time and that kind of inflow, the Reserve Bank will be able to manage. Not only with regard to the inflows, but also should the cycle turn – it is not a probability, but one cannot rule out such a scenario. So, Reserve Bank will be able to handle the kind of inflows or outflows that one can generally associate with bond inclusion, mainly because we have strong buffer of forex reserves.
The rupee trade is now becoming bigger. In fact, we understand that the Indian refinery is also now ready to get oil, with part payment going in Indian rupee. Do you see the rupee denominated trade growing exponentially?
Shaktikanta Das: One has to understand why we are doing the rupee denominated trade. Now dependence on one currency for international trade involves a bigger amount of risk. When you import and export or when your global international trade is dependent on more than one currency, the risk of exchange rate fluctuation in that single currency gets minimised.
We have made a beginning with regard to rupee, that is, the local currency settlement or the rupee denominated settlement. There are two different things. One is through the Vostro account mechanism where the settlement is entirely through rupees. The other one is local currency denominated, meaning if there are two countries, the respective currencies can be utilised for settlement.
Therefore, our effort is mainly in that kind of environment…., it is in that kind of a context. Particularly, we are trying to build it up with countries with which we have a large trade volume. So, therefore, we expect this to steadily improve. It cannot happen overnight. We expect it to steadily improve.
Our officials have had meetings with the oil marketing companies also. We have signed the agreement with India, UAE. You will very soon see action with a few other countries also and local currency denominated trade agreements being taken forward. We are working in that direction and I expect it to grow. The rupee footprint should grow, especially vis-a-vis the countries with which we have a larger amount of trade and countries from which we have a great amount of remittances.
You have called cryptocurrency dangerous and there was a time when cryptocurrency was almost like a mania. Now that crypto and Bitcoin prices are coming higher, do you see the level of participation is still low or level of participation of late after the price hike has also come back again in India?
Shaktikanta Das: The exuberance which was there earlier, two years ago, that exuberance is not there. There is greater awareness among the people about the risks and dangers associated with crypto. Some people will make money, but a larger number of people are likely to incur loss because it is a speculative product. We have nothing against technology. There has to be a clear line drawn between technology on which cryptocurrencies are based.
Technology is the blockchain technology. We have nothing against it. Blockchain has many applications. It is already under use. We are ourselves using the blockchain technology with regard to our central bank digital currency. So, the underlying technology is different, it is a different thing altogether that has to grow. We are ourselves using it in our central bank digital currency, the e-rupee. When that technology is used to develop certain products which are essentially speculative in nature and which are traded without any underlying and corresponding liability, every asset has to have a matching liability.
Now, in cryptocurrencies, whose liability is it? It is a speculative product because without any underlying liability, some trading is going on. I sell you something for 1000, you sell it to somebody for 2000, somebody sells it to another person for 3000. But what is the basis? Therefore, we call it a speculative product. There is greater awareness among the people, not only in India, but internationally. We have interaction with other central banks also very frequently and there is greater awareness, yes, today at the moment, as you said, some of these products are being traded at very high prices and so there could be some amount of interest which is perhaps more than what it was one year ago. If you compare with where we were two years ago, when there was exuberance building up, today there is a greater amount of realism.
When should we expect the full-fledged launch of the retail digital currency?
Shaktikanta Das: We are in no great hurry to launch the digital currency because we want to be absolutely sure about the safety and robustness and the integrity of the digital currency. So, it is a pilot project which we are running and even the pilot project size itself is now very high. The number of users, retail users of CBDC, today is about 4.3 million, that is about 43 lakh users of retail CBDC are there and the number of merchants who are using CBDC are about 40 lakhs.
So, a total of 47 lakh merchants and users are a part of this pilot project. We are learning from our experience, new challenges, new issues keep cropping up, both with regard to technology and with regard to sometimes questions around the safety features and the speed of transactions. We are developing the product ourselves and we want to ensure that when we are fully satisfied about the integrity and about all the safety features and the integrity of the currency, when we are absolutely confident that perhaps will be the right time to launch it in a full-fledged manner.
But we have no timeline or no target date. It all depends on when we feel that yes, we are ready to sort of launch it.
There is no downtime in RBI, but is there a downtime in RBI governor’s life? Do you ever get a Sunday?
Shaktikanta Das: Well, I think it is a part of the job and I cannot complain. I mean, if you have accepted a position, you have to also accept the challenges which are associated with it.
If a pantheon of great thinkers and great governors has to be made, your name will always be there on the pedestal. It is a very proud moment for us when there is a global acknowledgment as to the kind of things which under your leadership, RBI as an institution adopted. But unlike your peers, you do not come from a traditional economics background/ We are living in a complex world. How do you simplify things? How do you judge? What data points do you refer to?
Shaktikanta Das: First and foremost, one has to look at the big picture. You have to see the larger world, you have to first see the big picture and then you have to zero in into the micro details and you have to do a kind of a granular analysis. I mean, one cannot emulate the great warrior Arjuna, but as long as you see the larger picture, as long as you are focused on the larger picture, what is the larger picture for RBI? The larger picture is to ensure financial stability in the country and to support growth and also things like supporting innovation, supporting technology, making payments user friendly and financial inclusion, all those things.
One has to look at the larger picture and then zero in on various components of it and decide your action accordingly.
