Robust financial infrastructure key to safer, speedier financial flows

The safety and agility of the country's financial system is dependent on the strength of its institutions and the larger financial sector infrastructure, which includes banks and other financial service providers – both smaller and bigger, the new RBI governor Raghuram Rajan pointed out.

The RBI, he said, has made tremendous advances in improving the financial infrastructure strengthening the payment and settlement systems in the country. It has also been working on improving information sharing through agencies such as credit bureaus and rating agencies. ''I propose to carry on such work, which will be extremely important to enhance the safety and speed of flows as well as the quality and quantity of lending in the country,'' Rajan said.

On the retail side, he emphasised the use of the unique ID, Aadhaar, in building individual credit histories. ''This will be the foundation of a revolution in retail credit,'' he said.

For small and medium firms, he proposed Electronic Bill Factoring Exchanges, whereby MSME bills against large companies can be accepted electronically and auctioned so that MSMEs are paid promptly. This has been proposed by a committee on financial sector reforms headed by Rajan in 2008.

The new RBI governor also pointed to the need for a robust loan recovery system.

''Finance is not just about lending, it is about recovering loans also. We have to improve the efficiency of the recovery system, especially at a time of economic uncertainty like the present.''

He, however, said the recovery should be focused on efficiency and fairness – preserving the value of underlying valuable assets and jobs where possible, even while redeploying unviable assets to new uses and compensating employees fairly.

While the system has to be tolerant of genuine difficulty while coming down hard on mismanagement or fraud, he said promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize their failed ventures.

Rajan said RBI deputy governor Anand Sinha will go into the need for accelerating the working of Debt Recovery Tribunals and Asset Reconstruction Companies while deputy governor Chakrabarty takes a close look at rising NPAs and the restructuring/recovery process.

RBI proposes to collect credit data and examine large common exposures across banks so as to create a central repository on large credits to be shared with the banks. This, he said, would enable banks to be aware of building leverage and common exposures.

An RBI working group is looking the FSLRC suggestion of setting up an enhanced resolution structure for financial firms, he said.