THE SHAPE OF INDIAN ECONOMIC RECOVERY

quired to keep the policies in tune with changing times. The best boards don’t fall for quarter to quarter pressure and avoid all temptations for taking “calls” that could backfire them. Thinking long-term means that you expect a crisis to come out of somewhere every decade or so and keep your business best prepared to navigate that. It is not your ability to predict outcomes- we are not astrologers, but it is your ability to know the risks that will eventually set you apart from the rest. While what I laid out above are some of the characteristics you can observe from companies that have stood the test of times, some crises are far more powerful than others and test even the very best to their cores. However, such companies never lose their sense of vision. They remain committed and boring, know the variables that drive them, and have boards and managements that breathe a conservative risk management culture, which they ensure every employee buys into. These are the companies we will continue admiring even several decades later.

Disclaimer :- This article is an extension of an address delivered by the author as a guest speaker at IIM Amritsar. All thoughts and views expressed in the article are personal.

Dr. Sankarshan Basu

Professor IIM Bangalore Director PRMIA

COVER INTERVIEW

The recommendation by the internal working group of the RBI to allow large, well-run NBFCs to convert to banks has evoked mixed reactions. While some are of the opinion that it is a progressive step towards rebuilding the economy after the pandemic, others say that it may result in strict regulations and higher cost structures for NBFCs, thereby restricting their growth. What are your opinions about the same?

Looking at it, converting NBFCs into banks has some challenges in terms of structural changes that may happen. The first fundamental problem that the NBFC will face is the cost of funds. They wouldn't like to get out of their existing business. For e.g., Bandhan bank still runs its microfinance business. Therefore, if the motive is to cross-subsidize NBFC business through a banking business, it is a bad idea. Looking on the brighter side, NBFC s have a certain reach, which can increase the bank's financial inclusion services, therefore, capitalizing on this increased access.

Converting NBFCs to Banks would require removing the regulatory arbitrage between NBFCs and Commercial Banks since they both will have very different regulatory frameworks for the same products, which will reduce the participants' confidence in the system. Lastly, It all depends on the objective with which the NBFCs want to become banks. Is it to increase their access or because of the low cost of funds in the banking sector?

As per budget 2021 the FM announced the establishment of bad banks in the wake of rising NPA problems, especially after the pandemic. Could you shed some light on the efficiency of such a measure to reduce NPAs from the banking sector, and does India really need a Bad Bank at the moment. If so, what are the things that should be taken care of while setting up a Bad bank?

A bad bank in theory, is an excellent idea. Bad bank as an entity is new to the Indian market, but the concept is not. India also had a bad bank story not in the banking sector but in UTI. I would bring this down to two questions- why are bad banks being talked about today? In other words, why is any NPA a problem there? Do we have the political will to cover the NPA problems? I believe there are a lot many other factors that come in the process. Unless we have a political will and a transparent system, a bad bank will become another bank that will have to be funded by the taxpayer’s money by the government. Therefore, it will be another moral hazard created. Currently, there is no proper mechanism to deal with the NPA problem. So, in a market like India, where autonomy is only on paper, coming up with the idea of a bad bank is not a very good idea. It will only be a temporary measure and not a long-lasting solution.

Recently, RBI governor Shaktikanta Das said that the central bank plans to launch its own digital currency, and the work concerning the same is in progress. The move comes after there have been "major concerns" about cryptocurrencies, flagging potential risks to financial stability. Do you think that India’s financial system is ready for such a massive transformation?

Whether we like it or not, we need to accept the reality that the basis of Cryptocurrency and distributed ledger technology is here to stay. Although the technology platform is complex and hard to understand, it