ET EXCLUSIVE Q&A - `No Set of Rules Remains Relevant All the Time'

Central banking in India is about a lot more than interest rates . Monitoring banks, consumer protectio managing the currency, among other things . SS Mundra, a three-decade veteran of Indian banking, wil be guiding the Reserve Bank of India's efforts in many of these areas as its newest deputy governor.

In an interview with Sangita Mehta and MC Govardhana Rangan, he outlines his agenda.

That gives you an insight into how the world of regulators works

There are always areas that will not be understood well unless you go to the other side of the fence

From the perspective of being judged to becoming a judge, there will always be change of perception

When you come to the side of regulation, you start seeing the merit of some of the things you always complained of as a player

The other advantage is that if someone comes from industry, you bring the industry perception to regulation

What is the legacy that you want to leave?
I will be happy if we can fine tune the area of customer service, make it easier and build trust for customers to conduct their banking operations

The RBI has moved to risk-based supervision, which has been finetuned

The other major area is financial inclusion -a massive project on a shorter timeline, so should be taken to its logical end

This does not end with opening of the account, but rather, goes beyond that towards transactions

Currency management is also in my remit

Some of the worries that the country has about counterfeit currencies, adequate supply, quality of the currency and coins are customer interface activities which need to be addressed

These would be part of my broader agenda

When you talk about customer service, the recent changes to charges on ATM transactions come to mind

Is that being fair to consumers?
This decision came soon after I joined

I'm sure that as per RBI tradition, the pros and cons would have been weighed and there would be valid reasons for this

There is differentiation across geographies and even within our own ATM and other ATMs

Some things should be the remit of the state, such as providing security in and around ATMs

Now if banks are sharing or are expected to share (in the effort), it can be questioned just as much as banks charging for ATM transactions

Besides, the ATM should not be used as a play thing

As we reach that maturity, there will be room to review the entire thing

Charges vary widely between private and state-run banks

It there scope to make them uniform?
In respect of everything ­ be it fees or rate of interest -these questions keep coming up

Now if we have to make everything uniform, we are going back to a regulated atmosphere

The essence of an open market and competition is that it will bring in the best value for both sides ­ the customer as well as the bank

I think it is better left to competition

There is a perception that bad loans grew partly due to banks' poor appraisal skills

What can be done to improve these?
It is always desirable to improve appraisal skills

But let's look at the ground reality

In case of a larger project and a big ticket advance, a smaller bank will not give out funds as a sole lender -it must be part of a consortium

And in a consortium, typically, some large leaders who do the appraisals while the smaller banks are inclined to fall in line and take decisions

The problem arises because some of them choose aggressive growth, or take a short-cut in terms of big ticket exposure instead of through small retail branches

This hits back with double the force

Should the smaller banks then go it alone?
In the system as a whole, there is need to improve appraisal skills

They (the small banks) should not have put too much faith in appraisals done elsewhere

This area should not be outsourced

But NPAs in commercial banks didn't rise overnight

Why didn't it come to the RBI's notice all along?
Hindsight is a beautiful thing -if you travel back in time, you will notice things happen incrementally

The non-performing asset formation in the past year has been due to a combination of several things

There have been issues at the global and local economic level, besides those relating to appraisal and poor communication among bankers

These things happen across geographies

What is important is to draw the right lessons and see to it that safeguards are in place

RBI is striving towards that

What are these lessons and what needs to be done to ensure they are not repeated?
There needs to be much better communication between bankers and information should be available on a real-time basis

This has been made possible with the formation of a credit repository, and within a time frame, bankers are required to talk to each other

Also, at times, a non-performing asset is not created by the borrower alone; it can also be caused by lenders

Timely decisions are important, and lenders are now required to decide within a definite time

The third thing is leveraging level, which should be appropriate

The quality of equity is as important as quantity

These are issues that have come up and will go a long way in improving company assets

In the light of the recent Syndicate Bank episode, what can RBI do to bring greater integrity to the selection of CMDs and executive directors at public sector banks?
That is a case in isolation and cannot put the integrity of the entire exercise in question

Having said this, the position of RBI has been that rather than being part of the selection process, it should be the regulator, just like how the CEO gets a regulatory nod in the private sector

Regulation should be ownership neutral

Is there a conflict of interest in the fact that RBI is regulating as well as participating in some decision-making at banks?
In many respects, India is unique

Some of these things have evolved and been tested over a period of time

No set of rules remain relevant all the time

In the UK, Monetary Authority and FSA were separated

But now, prudential regulation is back with the Bank of England

Do we expect any changes on the supervision side?
Major changes have already begun since last year, when the RBI moved to riskbased supervision

A number of entities have already been covered, and more will follow in the current cycle

The other change is the supervisory college for banks, which are operating in multiple jurisdictions

What is your view on lateral recruitment at RBI?
It's not that RBI has not done lateral recruitment at all; it has done so within the regulations and provisions

But from the time the RBI has been in existence till date, our economy and ecosystem have undergone changes

RBI has been able to deal with these with the available resources

It has given birth to many institutions -NHB, IDBI, NABARD, MPCI -because RBI has a big pool of diverse talent

RBI is well equipped for a large area of activity, given the talent pool it has

As the world is evolving and turning more complex, international linkages are increasing

There is need to enhance the research and diagnostic capability on a different platform, and there will be room or need to bring people from outside

What will you do to make the life of PSU bankers easier?
A regulator's job is not to make anyone's life easier

Given a choice, they make it difficult

As a regulator you can't get into the nitty-gritty of their day-to-day management

It is important to address the root cause of the issue

If there is a continuity of management for a reasonable tenure, then medium to long term planning can be done

There have been legacy issues with public sector banks particularly because of the heavy recruitment, post-nationalisation

For a long time afterwards, there was no recruitment and now, it has resumed

Has that created a management vacuum?
It has created a gap in the middle level

Some banks were sensitive to the idea and accelerated promotions, but others didn't

Their degree of suffering depends on what the management chose to do in between

This phase will pass in the next two to three years

What is important is that banks should conduct a proper talent identification, groom them and give them the exposure so they create a future line of leaders

There are no short-cuts here

Banks which have consistently followed HR policies sincerely are in much better shape

Besides, HR issues, what other concerns do you have for commercial banks?
One is that asset quality needs to be taken care of

The second and larger issue relates to manpower planning and gaps in middle management

The third is to do with continuity at the top and bold governance

The fourth concern I have is with respect to capital, particularly for public sector banks

The other small concern is in the area of risk management

While considerable work has been done in the recent past, with the growing complexity in the environment, one needs to fine-tune here

Risk management is applicable to public sector phase, which will pass by in the next two to three years

What is important is that banks should do proper talent identification and then, do their grooming, true mentoring, give them the exposure so that you have the future line of leaders

There is no short-cut to it

This will need a consistent work to be done

The banks which have consistently followed the HR policies with a belief and really did it sincerely, they are in a much better shape

Where there is some jolts, like somebody decided to do something and the next one changed, it was all useless and turned everything upside down

Besides HR issues, what other concerns do you have for commercial banks?
Three-four major concerns are there

One, we have already discussed about the asset quality

It needs to be taken care of

Second larger issue is the manpower planning and gaps in middle management

Third is the continuity of the top and bold governance

The fourth concern I will have is in respect of capital, particularly for public sector banks

The other little bit concern will be about the area of risk management

While considerable work has been done in the recent past but with the growing complexity in the environment, I think this is the one area where one needs to fine-tune

Risk management is applicable to both sides, whether it is a public sector, or a private sector bank

Similarly, some of the larger issues will be in respect of KYC (know your customer), ALM (asset-liability management) issues and the rising incidents of financial frauds

Though a lot of work has been done, but there will be a room for further fine-tune the process

In a country where 60% of the population does not have a bank account, do you think that there is a case for consolidation?
I agree with what you are saying, but there is also a need to have some big sized banks to cater to certain segments of the economy to have banks on global scale

But that is one aspect

Then RBI has allowed differentiated banks like payment banks and smaller banks

The system will see all kinds of players and then they can take care of different segments of the population

In certain areas, if there are no banks, it does not mean that we should not allow large banks

When can small banks and payments banks start their operations? Our job as a regulator is to provide the framework. It is now for the players to apply. It will take time.

What are your concerns on currency management, particular on the issue of fake currency?One change I have seen is that reporting of fake currencies by banks is not still not to the extent it should be. If we consider two large segments of banking, the percentage of reporting by one is much higher than the other. This is one area where there is room for a lot of work.