Outlook 2023: Measured, Disciplined And Sensitive Approach From RBI And Government

In 2022, the resilience of the Indian economy stood out with strong growth and moderate inflation as compared to global peers who are battling high inflation and low growth. It is more important to understand why. I would say it is because in the period leading to 2023, both our key institutions responsible for managing the economy, the Indian government and the RBI, dealt with the Covid crisis in a measured manner, with discipline and sensitivity.

Economy always has a lagged effect to actions. During the Covid crisis, while advanced economies were printing trillions of dollars as cash handouts to the public and to small businesses, the government took a measured response of targeting support to the poorest, only 'guaranteed' ECLGS loans to MSMEs, and did not give cash handouts. In addition, in during the last five years, India did massive reforms such as GST, Indian bankruptcy code, privatisation (Air India), DBT of social benefits, fuel price alignment with the markets, all of which is saving billions of dollars every year on a structural basis now.

The RBI took a sensitive approach during the Covid crisis, providing Restructuring 1.0, moratorium, Restructuring 2.0, TLTRO 1, TLTRO 2, and later, withdrawing these measures in a measured manner.

The measured, sensitive and disciplined approach of the RBI and Indian government, coupled with their resolve to reform, is an enduring strength of our country, and gives confidence that Indian economy will remain fundamentally strong going forward. 

Coming to banking, the RBI has been highly consultative and vigilant in their approach. This way they have been able to instill conservatism among banks and, at the same time, able to actively shape the fast-evolving ecosystem. Indian banks are very well capitalised for the future.

Finally, the other big area of focus for the RBI as been financial inclusion. India achieved massive financial inclusion on the liability side by opening over 400 million Jan-Dhan accounts after 2014 and linking them with Aadhaar. But achieving financial inclusion on the lending side has historically been harder because it requires two steps: you need to not only lend but also collect money successfully. 

So, the RBI has a dual agenda on this front: on one hand they want to see financial inclusion in lending, but at the same time they want to see that asset quality remains strong. This paradox is being solved for the first time in our country’s history because the massive digitisation of the Indian economy and evolution of new technologies has enabled cash-flow lending in a much safer manner. So, the quartet of accurate cash flow assessment; ability to debit EMI from the trapped cash flows; legal protection for returned instruments; and credit bureau controls become an effective quartet control mechanism and is enabling deeper credit penetration in a safer manner. 

For instance, we can easily see that a small-business’s bank account always has, say, Rs 2 lakh between the 1^st to the 5^th of the month. So we know they can afford an EMI of Rs 1 lakh comfortably; hence, we reverse calculate the loan eligibility. The next lender will know the customer’s borrowing from the bureau and will factor for it. We can also discount receivables and collect on due dates digitally. The experience is that cash-flow based lending with digital scorecards beats all other forms of lending including income-tax-based lending hands down. At IDFC First Bank, we have practiced cash flow-based lending for over a decade now, with experience of gross NPA of 2% and net NPA of 1%. 

In addition, with the arrival of the digital ecosystem, every step of the loan process has now become more accurate and authentic. For instance, photocopies of passport and ration card could be tampered, while e-KYC has many authentication layers. Bank statement photocopies are replaced with PDF document which is more reliable. Monitoring has become more personalised and precise. Collections have become far easier through UPI. Data available from credit bureaus are far richer. The ecosystem developments of UPI, credit bureau, ONDC, Account Aggregator, etc. has enabled better quality and safer cash-flow based lending. Going into the new year, we should be more careful with credit quality and further fine tune cash flow technologies. 

Among the most notable initiatives by the RBI during the year has been the launch of CBDC. Today, India spends close to Rs 5,000 crore a year in printing physical cash apart from cutting lakhs of trees and consuming enormous quantities of ink. The CBDC is not a replacement of UPI. While UPI is a payment mechanism for money already in a bank account, the CBDC is a replacement of physical currency with digital currency. Several new use-cases could evolve in due course from here.

At IDFC First Bank, over the last few years, we have established a strong foundation with a highly granular liabilities customer base, 50% CASA, a highly diversified asset business with over 20 diversified lines of retail lending businesses, and businesses in wholesale banking, cash management, Fastag, credit cards, wealth management and so on. We look forward to a wonderful 2023 and we wish to participate and contribute to the new developing India by expanding both credit and deposits in an inclusive and safe manner. 

On the culture front, we are trying to imbibe in our organisation ethical banking in a systemic manner by providing jargon-free banking, removing complex descriptions, and removing need for complex calculations for fees that get debited to a customer’s account and so on. “Do unto others as you would have them do unto you” is a quote we are trying to follow sincerely.

V Vaidyanathan is the Managing Director and Chief Executive Officer at IDFC First Bank.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.