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    Governor of RBI Speaks on Emerging Challenges to Financial Stability

    September 03, 2019

    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

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