s s mundra : asset quality challenges in india – diagnosis and prognosis keynote address by mr s s mundra, deputy governor of the reserve bank of india, at the edelweiss credit conclave, mumbai, 28 april 2016. * * * 1. shri rashesh shah, chairman and ceo – edelweiss group ; members of the finance fraternity ; delegates to the conclave ; ladies and gentlemen! it is indeed a pleasure to be here this morning. in my address, i primarily intend to focus on some of the contemporary issues around our banking sector that have come to dominate news rooms, court rooms, board rooms and drawing rooms alike. i am hinting at loud vilification of bankers and promoters without distinguishing between the victim and the black sheep. this is not an endeavor to bat for either the banks or the promoters but only an attempt to put the things in right perspective and to encourage an objective assessment of the situation. but before i do that, let me begin with some good news on the economic front. 2. amidst the continued global sluggishness, domestic growth outlook remains positive for 2016 – 17 mainly on account of various structural reforms undertaken, expectations of a normal monsoon, easing of cpi inflation and rising private consumption. focus on rural and social infrastructure sector and decline in subsidy outgo have resulted in improvements in the fiscal front, both quantitatively and qualitatively. over the recent past, steel prices have strengthened both, globally and domestically, especially after introduction of the minimum import price. cement and auto sectors have also shown signs of growth pick up while the demand for oil has also increased by about 11 % in terms of quantity conveying some signs of buoyancy in economic activity in the country. 3. let me now come to the main issue that i wanted to focus on this morning. what i am going to speak may sound like a medical script but that is how this story can be best described. i begin with talking about the symptoms of the disease that had shown signs of turning malignant. symptoms 4. the signs of rising stress in the banking system became increasingly evident in the years beginning 2012. the stressed assets ( gnpa + restd. std. assets + written off accounts ) for the banking system as a whole, which stood at 9. 8 % as at the end of march 2012, moved up sharply to 14. 5 % as at the end of december 2015. during the same period, the stressed

##f to be over 4 per cent this year, not very different from last year. again, we do not, at this point, see the signs of the rapid collapse in global demand we saw three years ago. at home, most of the information coming in suggests the economy has grown at close to an average pace over the past year. this outcome was weaker than we had expected a year ago. it was partly due to the effects of flooding on resource production but also due to softer outcomes in the non - resource side of the economy. cpi inflation has come down, as expected, as the impact of last summer ’ s floods on food prices reverse. in underlying terms, inflation was about 2½ per cent over 2011, also a slightly lower outcome than we had, at one point, thought might occur. the labour market was generally softer in 2011 after a year of unusual strength in 2010 ( though the unemployment rate at its latest reading was virtually unchanged from a year earlier ). these changes to the macroeconomic picture, against a backdrop of a period of intensified international turmoil, saw the board lower the cash rate by 50 basis points in the closing months of 2011. perhaps surprisingly in the face of developments in wholesale funding costs, this was initially fully reflected in a reduction in most lending rates, though there has been a partial reversal of that recently. we have repeatedly made clear that the shifting relationship between the cash rate and other rates in the economy is a factor the board takes into consideration in setting the cash rate. that will remain the case. recent developments do not materially affect the capacity of monetary policy to achieve its goals. looking ahead, the bank ’ s central expectation is for growth to be close to trend, and inflation close to the target, over the coming one to two years. there are, naturally, risks surrounding this central view. those are spelled out in the latest statement on monetary policy. perhaps what is most noteworthy about the australian economy is the way in which the drivers of growth have changed in recent times. the bank has spoken at length before about the terms of trade, and the resulting resource investment boom, which is still building and which will take the share of business investment in gdp to its highest level for 50 years. we have spoken also about how, on the other side, household behaviour has changed – people are saving more and borrowing less. spending is growing in line with income, but people are spending their money differently. the retail sector is finding it has to adapt to this