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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.

Effective financialisation has been a key enabler in this journey. This has been facilitated by the growth of financial institutions in terms of institutional outreach, last mile presence and availability of banking services over multiple channels. Expanded bank presence across the country, growth of nonbank financial intermediation and the concomitant efforts of the authorities to further financial inclusion and democratise credit have aided the process. The concepts of door-step banking and banking correspondents (BCs) have revolutionised the idea of financial inclusion per se and facilitated overall deepening of financialisation in India. More recently, the evolution of fintech entities and their interplay with the formal financial system has been instrumental in transforming the way financial products and services are delivered to masses. However, the changes have also brought forth several challenges in using the existing and conventional approaches for regulating these activities, which is an issue that we need to address as regulators.

II. Credit growth – Its role in Financialisation & Need for Orderliness

The word ‘credit’ has its genesis in Latin word credere which means ‘to entrust’. The financial usage of the term ‘credit’ also borrows the same idea of trust whereby money is given to an individual or entity on the trust 3 with the expectation of getting it back with some reward in the form of interest. Of course, for the financial entity this trust rests on both sides of the balance sheet. The financial institutions, for example banks, are able to raise funds from public as the latter trust the institutions to repay their deposits. At the same time, when such financial entities lend funds to their customers, they must be able to have a similar degree of trust on the repayment capability, willingness and abilities of their borrowers. Hence, money-flow in the system is based on mutual faith. The idea of financialisation and its success is built on this edifice of trust.

There have been several studies which establish that credit plays an important role in financialisation. Empirically too, it is observed that the growth of GDP in India and credit flow to commercial sector by banks are positively correlated with each other. Over time, the growth in credit flow has also outpaced the growth of the economy, contributing increasingly to facilitate availability of capital to the productive sector of the economy. To give some perspective on this growth, suffice it to say that the credit-toGDP ratio which was ranging around 7-8% in 1960s has increased significantly to around 55% by the beginning of this decade.

While acknowledging the impact of financialisation, let me also focus a bit on how the changing components of the credit markets have larger implications for financialisation in India. The traditional form of credit involving loans extended by financial institutions have dominated the credit markets in India, but of late there has been an upswing in other forms of credit instruments. The market linked instruments such as corporate bonds, debentures, and commercial papers, in particular, have manifested an upward trend. Data indicate that, while banks still account for a large proportion of credit flow to commercial sector, other sources of borrowings such as from non-banks, or through corporate bonds and foreign borrowings also show a rising trend.