It is a false perception that the Reserve Bank of India (RBI) is intrusive and micromanages banks’ affairs. The supervisory intensity is meant to ensure banks remain stable, strong, and resilient, says RBI Deputy Governor M K JAIN, whose portfolio includes supervision.

In a free-wheeling interview with Tamal Bandyopadhyay, Jain, whose five-year tenure ends on Wednesday, talks about the importance of technology, customer service and financial inclusion, besides the RBI’s focus on governance at banks and financial institutions, and migration to principle-based regulations. Edited excerpts:

You said in a recent speech that banks would have to transform like technology companies, continuously innovating and investing in upgrades. Tell us more.

Technologies like big data, cloud computing, artificial intelligence (AI) and machine learning (ML) are revolutionising financial services globally. They are enabling new entrants to offer customised services and bring in more convenience and speed at an affordable cost.

But banks face some inherent limitations, such as legacy core banking systems built around standardised products, organisational complexity, and rigidity in the business model. So, they are not able to provide the level of customer experience that financial services companies offer. Unless they innovate and invest adequately in technology and skilled resources, banks will fall behind.

I believe that banks need to innovate, collaborate and invest in technology to be able to compete with technology firms and prosper.

Whether we call it intrusive supervision or micromanagement, what is behind the RBI’s new-found aggression on the supervisory turf?

Supervision is not intended to be intrusive or punitive. Supervisors are not risk managers for supervised entities. Also, the RBI does not interfere with the commercial judgement of the supervised entities.

Supervision is the fifth line of defence in banking. It is an additional layer of oversight – beyond the three lines of defence (management, risk management and compliance, and internal audit), and a fourth one of external audit. Supervision steps in only if the first four lines fail.

As a supervisor, the RBI focuses on early identification of risks and initiation of suitable corrective actions. We have been seeking more data from banks to conduct deep-dive analyses. The perception that the RBI is intrusive or that it is micromanaging banks’ affairs is not correct. The intensity of supervision is enhanced to ensure that banks remain stable, strong, and resilient.

Very often, the RBI supervisors identify gaps using banks’ own data that these banks are unable to report.

You met the boards of public and private banks. At these meetings, the Governor spoke about looking at banks’ business model. Is that the regulator’s job?

Banks sometimes pursue business models in line with market trends, without appreciating their own inherent capabilities. In some cases, they go for aggressive business strategies without compensatory controls and loss-absorption capacities. Understanding a bank’s business model and strategy is essential for early identification of risks and vulnerabilities. In fact, weaknesses in business models have potentially been at the root of recent bank failures.

Two conferences were organised to sensitise bank directors to various aspects of governance. To reduce the scope of evergreening loans, the RBI has followed a multipronged approach involving an emphasis on system-based automation of asset classification and provisioning requirements, preventing misuse of internal accounts, mandating disclosure of divergences and greater structured engagement with external auditors. Now there is much better assurance on the true and fair representation of banks’ financial statements.

The number of banks required to disclose divergences has come down significantly in recent years. We have accordingly brought down the threshold for disclosure from 15 per cent of incremental non-performing assets (NPAs) to 10 per cent by March 2023, and further to 5 per cent by March 2024.

Take us through the regulator’s new supervisory landscape. What has changed?

I will focus on just five major aspects to give you a perspective on the structural and cultural changes in the new supervisory regime.

First, we have attempted to change how supervision is viewed – both by supervisors and the supervised entities. From an ex-post outcome-based assessment, the focus has now shifted to a forward-looking material risk-based assessment. Instead of merely identifying the gaps, we now try to identify the root causes for those issues and fix them in a timely manner. We have moved to a continuous engagement model through dedicated senior supervisor managers.

Second, there is more two-way communication with all stakeholders, including banks’ boards, their chief executives, key management personnel, auditors, and market participants.

Third, we are attempting to make timely and decisive supervisory interventions under a formal structured escalation matrix that ensures objectivity and consistency.

Fourth, we are focusing on data analytics in a big way, utilising both structured and unstructured data. Using AI, ML, and other tools, we plan to gain supervisory insights from voluminous data from sources like board notes, social media posts, news reports, etc.

Finally, we are investing in building capacities by recruiting and upgrading the skill sets of the supervisors. We have established a dedicated College of Supervisors  and aim to make it a ‘centre of excellence’, not only for India, but also other neighbouring jurisdictions.

Won’t the RBI’s new approach create fear among bankers and lead to a slowdown in lending? That will affect growth…

On the contrary, the new approach will improve banks’ ability to support economic growth. The improvement in the supervisory framework will foster an environment where some prescriptive regulations would pave the way for more principle-based regulations. This, combined with a strong risk-based supervisory framework, will make the financial system far more equipped to contribute to the country’s economic growth by innovating quickly even while dealing with uncertainties.

The RBI is quite conservative when it comes to clearing the compensation of bank chief executive officers (CEOs). How will they attract talent? If banks are to transform into technology companies, they will need extraordinary talent. Shouldn’t you leave it to bank boards to decide on the top managers’ compensation?

Excessive compensation breeds excessive risk-taking. The North Atlantic Financial Crisis of 2008 demonstrated this, and addressing the compensation issue was also a part of post-crisis reforms. The RBI guidelines on the compensation of whole-time directors, CEOs and material risk takers have been framed in line with global standards and best practices.

Compensation and talent are not perfectly correlated. There are several factors other than compensation that are needed for job satisfaction, such as job content, challenging assignments, etc.

Is it time to allow banks to fund mergers & acquisitions? The maximum amount a bank can give as a loan against shares at present is Rs 20 lakh. Acquirers typically seek loans with shares as collateral. As Indian banks are not allowed, corporations approach foreign banks…

There is perhaps a case to revisit the Rs 20 lakh ceiling in view of the increased maturity, depth, and development of capital markets.

We do not hear much about financial inclusion anymore. The Pradhan Mantri Jan Dhan Yojana (PMJDY) opened at least 490 million bank accounts. Is that enough?

The RBI has taken several initiatives to strengthen financial inclusion. Let me focus on five important aspects.

We have tried to encourage collaborations among financial players in the markets to leverage synergistic benefits – through guidelines like those for co-lending, on-lending and fintech. We have also tried to give a fillip to digitisation. For instance, in 2019, we launched the initiative of making at least one district in every state fully digitally enabled for payments. Encouraged by positive results, we scaled up the target from 42 to 200 districts.

Last year, we launched a pilot for end-to-end digitisation of Kisan Credit Cards (KCCs) in three states, which is likely to be a game changer. Initial results show that the turnaround time for processing and approval has come down from weeks to just a few hours, with negligible operating cost for the farmer, compared with 5-6 per cent earlier. We have also attempted to address regional disparities in priority-sector credit flow to credit-deficient districts by assigning a higher weighting to priority-sector achievement for underpenetrated districts.

To promote financial literacy at the grassroots level, we decided to scale up the centres for financial literacy (CFLs) in 2021. Each CFL covers three blocks. By March this year, 1,469 CFLs covering 4,389 blocks had been set up. We plan to cover the entire nation by March 2024.

Finally, the RBI launched the Financial Inclusion Index in 2021 to comprehensively capture the extent of financial inclusion through the country across three dimensions – access, usage and quality – under 97 indicators. The index helps us measure progress and focus our resources on areas that need attention.

The Insolvency and Bankruptcy Code (IBC), which is seven years old now, seems to have lost its teeth. In some of the recent high-profile cases, the bids have been less than the liquidation value. What needs to be done to improve the recovery of bad loans?

A few outlier cases of bad outcomes, even if absolute amounts are large, should not be the yardstick to gauge the IBC framework’s efficiency. Of course, some improvements are needed, especially to reduce delays, and sticking to the schedules prescribed in the code.

The IBC is often the last resort. As in all walks of life, the tool of last resort is usually less effective. In many cases, the value of the corporate debtor is fully eroded even before the insolvency application is filed. The IBC is not a magic wand that can resurrect dead entities. It should be used at an early stage of stress so that value can be preserved.

The RBI’s record as a regulator has been very impressive, particularly the way it handled the banking system during the Covid pandemic. Looking at global regulators, is there anything else it can do?

The RBI has been making its regulations more principle-based, activity-based and directed towards reducing regulatory arbitrage between different segments of regulated entities. Also, while framing regulations, without compromising on prudence, the RBI factors in the cost of compliance and the need to facilitate ease of doing business. I believe this is the right direction and we can work more on these aspects.

How long will the good time continue for banks? Do you see any signs of the cycle reversing?

Most financial parameters indicate that the banking system is resilient, sound, and stable. Banks should use this period to strengthen their risk-management capacity and build up adequate capital and provisioning buffers. This is required because, often, complacency sets in during good times and risks get ignored.

This was one of the motives behind engaging with bank boards – sensitising them to remain alert and agile with a focus on robust governance and pursue sound business models. The revised supervisory approach should also help banks in early identification of risks.

I am confident that this upcycle will continue for a reasonable period, as the Indian economy has proved to be resilient in the face of successive shocks.

You have done some work on the customer service turf…

Trust forms the bedrock of the financial services industry, and customer service plays a crucial role in building and maintaining that trust. This is close to my heart. We have taken several initiatives in this area.

To strengthen internal grievance redress at the level of regulated entities, the RBI introduced the internal ombudsman mechanism. A bank is required to establish an independent authority to review complaints before they are rejected. This model was extended to other classes of regulated entities like non-banking financial companies, non-bank payment service providers, and credit information companies.

For complaints that come to the RBI, in 2019 we launched a Complaint Management System – a 24×7, end-to-end, digitised complaint-lodging and processing platform. Here, customers can also track the status of their complaints.

In 2021, we integrated the existing ombudsman schemes into a single integrated scheme which not only did away with the concept of regional jurisdiction but also expanded the scope of admissible complaints.

We have also set up the Centralised Complaint Receipt and Processing Centre to receive and process all physical and email complaints. A multilingual contact centre with a single all-India toll-free number has also been set up to respond to customer queries.

These measures have been supplemented by undertaking a root-cause analysis of complaints, greater disclosure requirements on nature and disposal of complaints by regulated entities, and deeper supervisory review of complaint redress. Along with the regulated entities, we have also taken several measures to increase consumer awareness with nationwide multi-channel awareness campaigns.

Your portfolio also included human resources (HR). Tell us about special HR initiatives taken by the RBI, particularly amid challenges presented before all organisations by the Covid pandemic.

The RBI is a research- and wisdom-based institution. In the past five years, we have addressed several concerns on various issues, including career progression, performance management, and employee engagement.

Last year, the RBI launched ‘ePathshala’, a self-paced learning platform. There is also the ‘Sehat Sampada Wellness Initiative’, a monthly webinar where renowned doctors address health concerns triggered by lifestyle-related issues.

An assistance programme has also been initiated to help employees with personal or work-related issues that might affect their job productivity and health, besides mental and emotional well-being.

An initiative called ‘Voicing Opinion to Inspire, Contribute, and Excel’ (VOICE) provides employees a platform to interact with the management in a free-flowing format. We are in the process of extending this, holding townhall meetings at regular intervals.

You were a commercial banker earlier. But since June 2018, from your perch as a deputy governor, you have seen the banking sector through a different prism. What is your advice to bankers?

I would like to highlight three aspects. First, I believe the future of banking will be shaped by advances in technology, leading to greater business and process automation, changing customer expectations, and evolving regulatory landscapes. Banks need to build capacities in this area through investment in their staff and technology resources, besides looking for opportunities to derive synergistic benefits through collaboration with other players.

Second, banks must responsibly leverage the wealth of data that they possess while safeguarding against data breaches and preserving customer privacy. And third, in an interconnected world, banks need monitor and remain resilient to macroeconomic and geopolitical shocks.

This interview first appeared in Business Standard. The writer is a Consulting Editor with Business Standard and Senior Adviser to Jana Small Finance Bank. His latest book Roller Coaster: An Affair with Banking