rajeshwar rao : building trust through governance - the backbone of stressed assets reconstruction keynote address by mr rajeshwar rao, deputy governor of the reserve bank of india, at the conference " governance in arcs – towards effective resolutions ", mumbai, 17 may 2024. * * * deputy governor shri swaminathan, executive directors, chairmen of the board and acb of arcs, mds & ceos of arcs, my colleagues from rbi, ladies and gentlemen, i am happy to be amidst you today to talk about the crucial topic of governance in arcs. but before i address the issue of governance, let me briefly discuss the importance of credit risk management and the critical role envisaged for arcs – both in terms of legislative intent and regulatory expectations, in india's financial landscape. role of arcs in the stressed asset management we all know that books of our financial institutions are largely susceptible to credit risk as loans and advances constitute a large proportion of the asset portfolio. the credit risk weighted assets ( credit rwas ), in fact, constitute around 80 per cent of total rwas of the banking system. therefore, any prudential regulation to safeguard the stability of financial system must remain alive to the credit risk in the books of financial entities, banks and non - banks alike. the credit life cycle involves four distinct stages. these include the stage of sourcing of credit proposal ; appraisal and underwriting ; disbursal and monitoring ; and, finally repayment which then starts off the next iteration of the credit cycle. if, however, for some reason, the borrower does not pay the dues on time and a loan does not enter the fourth stage, there could be a problem. arcs have been institutionalised to play a crucial role at this juncture. they are the institutions to enable loan originators to focus on their core function of lending by taking over stressed financial assets. the arc framework is also designed to help borrowers revive their businesses, if possible. this in some ways is also intended to preserve the productive asset generated out of the loan. reconstructing distressed assets is by no means an easy task. arcs are expected to step in, armed with expertise in recovery and reconstruction of ailing assets, and help reduce the level of non - performing assets in the banking system by taking possession of the secured asset of the borrower. however, efficacy of all such endeavours hinges upon the bedrock of governance. so, in today's address,

now. one can imagine what would have had happened to our external situation, if within a very short period, domestic residents decided to rush to their neighbourhood banks and convert a significant part of these deposits into sterling, euro or dollar. no emerging market exchange rate system can cope with this kind of contingency. this may be an unlikely possibility today, but it must be factored in while deciding on a long term policy of free convertibility of “ stock ” of domestic assets. incidentally, this kind of eventuality is less likely to occur in respect of industrial countries with international currencies such as euro or dollar, which are held by banks, corporates, and other entities as part of their long - term global asset portfolio ( as distinguished from emerging market currencies in which banks and other intermediaries normally take a daily long or short position for purposes of currency trade ). another issue, which has figured prominently in the current debate, relates to foreign exchange reserves. as is well known, india ’ s foreign exchange reserves have increased substantially in the past few years and are now among one of the largest in the world. the fact that most of the constituents of india ’ s balance of payments are showing positive trends - on the current as well as capital accounts is a reflection of the increasing competitiveness of the indian economy and strong confidence of the international community in india ’ s growth potential. for the first time after our independence 56 years ago, the fragility of the balance of payments is no longer a concern of policy makers. this is a highly positive development and regarded as such by the country at large. nevertheless, there are two concerns that have been expressed by expert commentators - one is about the “ cost ” of additional reserves, and second concerns the impact of “ arbitrage ” in inducing higher inflows. so far as the cost of additional reserves is concerned, it needs to be borne in mind that the bulk of additions to reserves in the recent period is on account of non - debt creating inflows. india ’ s total external debt, including nri ( non - resident indian ) deposits, has increased relatively slowly as compared with the increase in reserves, particularly in the last couple of years. in fact, india pre - paid more than $ 3 billion of external debt earlier this year. it may also be mentioned that rates of interest paid on nri deposits and multilateral loans in foreign currency are in line with or lower than prevailing international interest rates.