Vault matters: New leadership at RBI is rearranging priorities

RBI reinstated the earlier risks weights on bank loan to NBFCs.

There was a lot of uncertainty around how the Reserve Bank of India as an institution would function after Shaktikanta Das’s term. Would the new governor Sanjay Malhotra be approachable and receptive to feedback from industry and would growth be his priority were doubts clouding over bankers?

On January 27, some of it was dispelled, when Malhotra met bankers for the first time. He gave them a satisfying feeling that nothing much is going to change and the comfort they had with Das and his teams is something they could continue to enjoy under him as well.

On February 7, when Malhotra delivered his first monetary policy committee commentary and addressed the media, he gave banks a lot more sense of comfort than before. With a rate cut on expected lines and a massive clarification that it would not be possible for banks to adopt the proposed liquidity coverage ratio guidelines, or project finance guidelines or for that matter, even expected credit loss norms, it gave the industry a huge reason to cheer.

What happened earlier this week, however, seems to have literally erased the doings of the previous governor. RBI reinstated the earlier risks weights on bank loan to NBFCs. Not that this is going to really open the tap of credit lines to non-banks, but sentimentally it does point to the fact that policies will evolve around a centrifugal aspect called growth.

While the industry had some clue about a likely easing in LCR norms etc., resorting of risk weights for loans to non-banks came as a pleasant surprise. With this, the question is whether strict measures under the Das regime is getting overturned and at a fast pace. But why should that be a shocker to any one, or a question to ask?

It’s an open truth that every Governor enters the Mint Street with a certain mandate. For instance, Raghuram Rajan had a huge crisis of taper tantrum to battle when he took charge. Shaktikanta Das had the mandate to stabilise the banking system, which was under tremendous pressure thanks to IL&FS going belly up. Much ahead of this, Governor Subbarao was tasked, quite similar to Malhotra, to revive the animal spirits in the economy. Therefore, it is not unusual for every incoming governor to set the ball rolling with their agenda and in the process, if some of the past doings are to be reversed then so be it.

Quite certainly, credit growth to NBFCs falling to single digit from a healthy 20% mark back in mid-2023 doesn’t paint a great picture from a growth perspective. NBFCs hold the distinction of being disseminators of last mile credit and play a huge part touching the semi urban and rural areas.

But here’s the catch. The issue of overleveraging is something the lending ecosystem is still battling with and a solution is nowhere near sight. At a juncture like this, to even dangle a carrot to NBFCs may once again unleash widespread (aka reckless) lending. What good is growth, if it might expose lenders to systemic risk? Ironically, whether it’s a repo rate cut or easing the risk weight assets, both may take a long time to really percolate to the grassroots to spur growth. Therefore, while the reversal of stance may not warrant questioning, the move may have been timed better.