RBI should build a dialogue around its financial stability report and make it more interactive..

It could not have been a better coincidence that my Mint article on need for a financial policy committee was released on the same day when RBI released Financial Stability Review for June -2018.

There were couple of comments/suggestions on the Mint article. One of them was that we need to hold authorities accountable for financial stability. It should not be the case that these reports and publications are released with all highlighting “all is well” to suddenly saying “all is unwell”. With so much at stake and pushing people towards financialisation, the authorities should tell us what went from well to unwell stage. We should not have the situation that the RBI Governor tells us that RBI cannot regulate public sector banks when things go bad for these banks. These risks have to be identified and more importantly communicated to people through these publications.

RBI clearly can make tremendous progress on both accountability and communications front.

Macro-stress tests indicate that under the baseline scenario of current macroeconomic outlook, SCBs’ GNPA ratio may rise from 11.6 per cent in March 2018 to 12.2 per cent by March 2019. The system-level capital to risk-weighted assets ratio (CRAR) may come down from 13.5 per cent to 12.8 per cent during the period; eleven public sector banks under prompt corrective action framework (PCA PSBs) may experience a worsening of their GNPA ratio from 21.0 per cent in March 2018 to 22.3 per cent, with six PCA PSBs likely experiencing capital shortfall relative to the required minimum CRAR of 9 per cent.

What can anyone make out of this? Even reading FSR text is taxing for the so called “finance trained” compared to other reports. There are lots of regressions etc at the end of the text which require explanations. Having a press conference and some more events for researchers will surely help in understanding the methods and assumptions.

NZ, England use a lot more pictures etc to convey their message. Shortening the report and adding more interactive ways, can help people understand these things much better.

  • RBI just seems to be making these reports mechanically. There is very little to learn from these reports as there is a set routine of chapters following each other. One way to address this is to encourage interesting research in FSR as done by others like on topics of household finance, interest rates could be done. So yes this would add to the already long report, but then this means existing content has to be shortened extensively. RBI could also start to release seperate research on financial stability on several aspects discussed in FSR. The idea is that the conversation should continue and not be just a bi-annual formality.

These steps alone will help go someway in the direction of Financial Policy Committee. However, FPC is still more valuable as it will bring more expertise from outside of RBI. The FPC members should be allowed to speak on public forums and share their research as well.

 

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