Amol Agrawal
During the year-end, the Reserve Bank (RBI) releases two publications: Report on Trend and Progress of Banking in India (RTPOB, annual) and Financial Stability Report (FSR, bi-annual, released in June as well).
These two reports sum up the developments in Indian banking and financial sector. Given the amount of attention on ongoing and emerging risks in the banking and financial sector, both these reports are really important.
According to the RBI Act (1934), the central bank is required to publish RTPOB annually. The 2019 edition (194 pages) is divided into four main chapters: global banking developments, Indian commercial banks, cooperative banks and non-banking financial institutions.
This year’s report points out that non-performing assets (NPAs) of commercial banks have declined to 9.1 percent in March 2019 from 11.2 percent in March 2018 and banks have returned to profitability. The RBI credits the bankruptcy code for the decline of the NPAs, and profitability. In cooperatives, Urban Cooperative Banks (UCBs) recorded rise in deposits, but fall in interest income. In NBFIs, the growth of credit continued to slow.
The FSR (114 pages) is divided into three chapters. First chapter on macrofinancial risks points to global (Brexit, trade tensions etc.) and domestic risks (slowing investment and consumption growth) for the financial sector. Second chapter evaluates risks for financial institutions. Under the baseline scenario, the NPA ratio may increase from 9.3 percent in September 2019 to 9.9 percent by September 2020 due to changes in macroeconomic scenario.
In September 2019, the network analysis showed that total bilateral exposures between financial firms registered a marginal decline and share of inter-bank assets also dropped, leading to a reduction in contagion losses. The third chapter on financial regulatory developments talks of the RBI getting more powers to regulate NBFCs (non-banking financial companies), new liquidity management framework and resolution of stressed assets.
Given this brief, what do these two reports mean for so called ‘aam aadmi’ (common man)? These reports are important as banking and financial stability impacts everyone in the country. The recent run in PMC cooperative bank is a clear example of how people should be made aware of health of banking and financial system.
Well, it is true that people cannot be explained the nitty-gritties of the financial system, but they should be made aware of some broad developments. With increased digitisation and push for financial inclusion, it is imperative on the regulator to try and reach out to people and explain these developments. The question is how?
Interestingly, the RBI can easily get solutions from central banks elsewhere. Globally, some of the central banks have not just opened up channels of communication, but also how they communicate and explain to the public.
First approach could be to make these reports more visual. Central banks of New Zealand and England use cartoons to convey key policy decisions and explain reports. Bank of England releases visual summary of its monetary policy report which uses charts and cartoons to explain some of the complex ideas and decisions. The Reserve Bank of New Zealand, which started using a similar visual approach with monetary policy report, has extended the approach to FSR (see the graph). This representation of the report does help the lay reader at least get some ideas and hopefully be motivated to read further!
Time for RBI to simplify its reports
Bank of England researchers in a 2018 research paper even showed that the Visual Summary of its Inflation Report improves comprehension of its main messages amidst the public. Better comprehension also helps build public trust for the central bank which is critical during a time “when trust in public institutions has fallen”. It will not be surprising to read similar results when the NZ central bank decides to conduct a similar study.
Second approach for the RBI could be to add videos which explain the key messages of the respective reports. This approach is used by the BIS (Bank for International Settlements) and the IMF International Monetary Fund) where the lead authors explain both the executive summary and chapters of the report. This is really useful. First, it helps connect to the audience in a direct way. Second, a large section of the public is averse to reading and these videos bridge the gaps. Third, it brings some of these authors to public’s attention as they usually work in background. These authors also have to figure out simple ways to communicate their key ideas to the masses which most economists would say is not an easy job at all.
The third approach is for the RBI to open a blog and communicate about its reports/research. Though a blog has become an old medium now, it is still useful for a central bank which communicates in a formal language. A blog is more informal and connects better to the audience, especially the younger generation.
Central banks of England, Norway, Atlanta Fed, St. Louis Fed and so on have their blog. The IMF also uses blogs actively to disseminate its research ideas. The RBI started a Twitter handle, but most of the tweets are just headlines of its press releases/notifications. The Indian central bank could take a leaf out of the Bank of Jamaica which uses reggae music to communicate the merits of inflation targeting Jamaicans!
Summing up, the RBI has a long history and strong tradition of preparing the reports and research on banking and finance. So far, these reports have been read by only a select audience of researchers and business media persons. The central bank should now take the next step of demystifying and simplifying its research for a wider public. The other central banks have sped up in this regard and it’s time for the RBI to catch up with its peers.
Source: moneycontrol.com