Rajeshwar Rao: Credit intermediation – can regulations tango with markets?

Keynote address by Mr Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, at the Inaugural Seminar on "Banking regulation, intermediary soundness, and system stability", at the Indian Institute of Management (IIM)–Kozhikode, Kozhikode, 4 September 2023.

Central bank speech  | 
12 September 2023

Distinguished Guests, Professors, and my dear students,

I am delighted to be here and share a few thoughts at this seminar.

The theme of the seminar very aptly ties in the two key objectives of banking regulation – enhancing resilience of institutions and maintaining systemic stability. In my address today, I would like to dwell, in detail, about an aspect that has a critical bearing on the soundness of the banking system - effective and de-risked credit intermediation. While credit intermediation in some ways describes and defines the role of the banking system in an economy, it also acts, at the same time, as the key channel for effective monetary transmission and greater financialisation of the economy. However, if not regulated appropriately, this channel can lead to the undoing of institutions and become a source of broader financial instability. Therefore, the bank regulation and soundness of financial intermediaries are necessary conditions to facilitate orderly credit growth. This, therefore, brings up a few issues and challenges in designing prudentially sound boundaries for the same. In this context I thought I could share some perspectives on the need for having robust credit markets and the way forward.

I. Financialisation - what do we mean and how it is relevant?

Let me start with the scope for financialization of the economy. Whenever we refer to financialization, in popular parlance it is understood to mean the expanding role of financial markets, financial actors, and financial institutions in the operation of the economy. Since independence, our economy has grown substantially, reaching the status of the world's fifth largest economy, while we set up ourselves on course to become the third largest economy in the world. This growth trajectory has been enabled and supported by a multitude of factors including greater entrepreneurial spirit, policy reforms, structural economic changes and development of institutional structures.