Governor of RBI Speaks on Emerging Challenges to Financial Stability
The RBI Governor Shaktikanta Das spoke at a conference in Mumbai about the emerging challenges to financial stability, including those resulting from the financial technology innovations. He highlighted that headwinds to financial stability could emanate from various sectors in the economy, with his focus being on four sectors: credit market, financial markets, external sector, and payments system. He also outlined RBI response to certain ongoing and expected challenges to financial stability in the country.
Mr. Das noted that, ten years after the crisis, the implementation of financial reforms is not yet complete and remains uneven, especially in the non-banking space. While dealing with such issues, country-specific situations must be factored in. The current state of the global banking sector also presents a story of uncertainty. While bank capitalization has increased significantly in the post-crisis period primarily due to Basel III reforms, bank profitability has been lackluster. Banks are facing increasing competition from non-traditional players, such as fintech and bigtech, which are taking advantage of digital innovation. These developments have implications for financial stability in emerging market economies like India. It is indeed imperative that banks capitalize on these technological advances and the associated business models. Regulators on their part also need to provide enabling frameworks for these endeavors by banks as well as the non-traditional players.
In India, the credit market is dominated by the banking sector, which plays a key role in financial intermediation in the economy. Monitoring the health of the banking sector is crucial for financial stability. Soundness of the banking system may have a bearing on the financial stability through various channels—excessive credit growth, maturity mismatches and liquidity issue, high proportion of non-performing loans, and over-leveraging, among others. He added that, in recent years, the overhang of stressed assets in the banking system has declined. New norms for resolution of stressed assets framed in June 2019 by RBI provide incentives for early resolution, with discretion to lenders on resolution processes. RBI is also in the process of building a specialized regulatory and supervisory cadre for regulation and supervision of banks and non-banks. Another important issue in this context is the immediate need to strengthen corporate governance structure in banks. Overall, Mr. Das highlighted that it is important that risk management systems, compliance functions, and internal control mechanisms are strengthened and made more dynamic.
The RBI Governor highlighted that the increasing frequency and severity of currency and debt crises globally and their ability to cause output loss calls for careful regulation and surveillance of financial markets. It is required to free up market forces by moving away from prescriptive to principle-based regulation, whose core features are simplification of processes, encouraging product innovation, removing regulatory differentiation across participant categories, and ensuring protection for retail market participants. New entrants into the financial services space, including fintech and bigtech firms, are altering the universe of financial service providers. These new players have made inroads in the provision of payment services, remittance services, and cross-border payments. Moreover, they have the potential to grow very quickly and become large and systemically important financial institutions, raising concerns over financial stability.
He added that the public policy approach needs to be more comprehensive and holistic, taking into account issues such as financial regulation, competition policy, and data privacy regulation. Coordination among various authorities—such as financial regulators, competition authorities, and data protection supervisors—becomes critical at this juncture. He concluded that new challenges are continuously emerging and RBI is continuously harnessing the regulatory and supervisory framework to better adapt to the evolving scenario.
Related Link: Speech
Keywords: Asia Pacific, India, Banking, Securities, Financial Stability, NPLs, Fintech, Bigtech, Systemic Risk, RBI, BIS
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Blake Coules
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
US Agencies Request Comments on Use and Impact of CAMELS RatingsRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.