A. It is easier to give licences to a small bank than to a megabank. I have to be much more careful about a mega bank because, if it explodes, there are large problems. If a small bank explodes there are smaller problems. This could be thought of as a proving ground for bankers. So, in that sense, you may be right that there is more room for giving licences (to smaller banks). I am not saying we are going to relax standards. But our worry over the performance can be somewhat more relaxed in case of small banks because we are less exposed to systemic risk compared to universal banks. However, we are committed to opening up the licence window for universal banks as well.

Q. We saw two niche licences in the universal banking space. Is there a change in approach?

A. There is an advantage in having different banks, but I don't think this was a deliberate part of the licensing process.

Q. How many licences can we expect under the differentiated category?

A. As in the past, we have set up two external committees without any RBI representative. They will opine on who should be given licences. We respect the opinions of the committees we set up. We don't have a preconceived notion of how many licences (we will issue) for each category. It, however, should not be a number that would overwhelm us and the system.

Q. What would be the time frame for assessing their performance?

A. I think, at least, till the teething phase is over. Once the banks are set up and run for a year or so, we will know what the issues are and what we need to do better the next time. That will enable us to reframe our rules if need be. We give around 18 months for banks to set up, plus a year more, for them to run. So, we have two and a half years before we are ready to open the window.

Q. You are also working on a new priority sector regime for banks. What has been the progress on that front?

A. We are in the process of looking at the priority sector regime to make it more relevant to today's economy. This is for all banks. The priority sector basically has two components: What is important for the economy and how to get more inclusion in the economy, and who are the people who are excluded from credit. Given these two objectives, we are looking at the priority sector process to ensure that if any sector is left out, whether they should be brought back. For example, we would have to find out whether we have enough finances to fund public infrastructure in smaller towns, the Swachh Bharat (initiative) and to build toilets. Those are the kinds of thing we have to look out for.

We will not have a separate private sector regime for foreign banks. I was misquoted earlier in the press. Once foreign banks understand the new priority obligations they will have to meet, they would be in a better position to decide on their own (whether to convert into a wholly-owned subsidiary or not).

Q. Given the deteriorating asset quality, Basel-III and capital challenges of banks, how concerned are you on the financial stability front?

A. I am obviously concerned with the rise in NPAs because it is a real loss to the economy. We need to bring down the level of NPAs and put the assets that are behind these NPAs back to work. If it is a stalled power project, can we get it restarted? Can it produce for the investment that is locked up? This is something we are working on. My general framework has been to make it easy for them to do the kind of restructuring and reshaping needed to make the financial structure viable. But they should not postpone the recognition of losses. Don't pretend. Let's convert the interest due into future repayments and just push the loan out even though I know the real asset does not have any hope of getting the feedstock inputs over its lifetime. It is a non-performing asset today, and it will remain an NPA tomorrow, but because I don't want to confront reality, I should not hide the loan.

Q. The RBI is not very keen to extend the restructuring deadline beyond March 2016. Isn't there a threat to financial stability given that many PSU banks have high restructured books?

A. Financial stability is not threatened because the losses ultimately belong to the government. The government has already underwritten the losses because they are public sector banks. The private sector banks' NPAs are significantly lower. So, I don't think we face a situation like in the West. The issue is, however, to minimise the loss to the government by shrinking the size of bad loans.

Q. You are not in favour of a weak bank merging with a strong bank. The idea of an individually held company for each bank is also not finding favour with PSU banks. Is a single holding company for PSU banks the solution?

A. If there is only one bank, there is no need for a holding company. The single holding company comes in if there are multiple businesses, such as insurance, mutual funds, etc. If an insurance or NBFC affiliate goes bad, it does not pull down the bank. We need to go to the holding company structure from the financial stability perspective. Financial holding is something that the Shymala Gopinath committee had suggested and, according to it, the Basel effort is going to be necessary. But, there is a separate issue. How does the government hold its stake in PSUs? There is talk about having a financial holding company where the government will own 50 per cent, and the financial holding company will own the government's 50 per cent in the bank holding company. That is possible. That would allow the government to disinvest some of its stake. The government will own only 25 per cent in the bank. But a view has to be taken on that.

Q. You made a fundamental shift to CPI as the nominal anchor for targeting inflation with a two-year glide path. What is the progress with the government on a new monetary policy framework?

A. Unfortunately, I cannot say more than that we are in discussion. There has been an exchange of views and it is continuing. As long as the structure is not finalised, we are not prepared to go public with it.

Q. Since it was part of the last Budget announcement, is there a possibility of signing the new framework before February 28?

A. I do not know the precise time. But, the intent is to get the right framework however much time it might take. The important element or objective of the framework is that the medium-term goal for inflation would be 4 (plus-minus 2) per cent. We have to specify after January 2016 how long it will take to get towards that level. If in January 2016, we are at 6 per cent, we are already within that band. But the question is should we go closer to the middle of the band.

Q. What are the challenges in inflation targeting, given the supply-side issues, high food component in CPI and the fiscal deficit?

A. These challenges exist in every country. First, we are not going towards pure inflation targeting. We are going to a situation where we have a primary inflation objective, but there would be other objectives also. When I took office, I was told that focusing on inflation is somewhat impossible in India. It is still being told to me despite the fact that inflation is down. I am not saying that we are fully responsible for it. Of course, fiscal consolidation has helped tremendously. The notion that India cannot consolidate fiscally is another thing that is being put out. People talk about fiscal dominance as if it's a permanent state of affair. Things can change. We should not keep echoing supply-side issues and fiscal dominance as if to say that we should allow any level of inflation. Of course, the Indian public likes low inflation and that's what we have been trying to do.

Q. In the monetary policy document, you have used the word "sustained high quality fiscal consolidation". Can you elaborate on it?

A. I can give you an example. If we do better targeting of subsidies. If we target them towards the needy, reduce the leakage and move the savings to public investments. That's a high quality movement because on one hand it is about shrinking wasteful expenditures and, on the other, increasing the expenditure on creating long-term supply by, say, investing in highways, in the railways, etc. That should, over time, bring down the cost structure also. If the RBI is looking at the fiscal policy it is not to pronounce what the government should do. We are not sitting in judgement over the government. We are looking at it primarily from the inflationary consequences. When fiscal consolidation is of high quality, inflationary consequences are good.

Q. Following the savings in fuel subsidy, divestment and the telecom auction, the government is likely to meet the fiscal deficit target of 4.1 per cent for the current year despite weak tax collection. Does that signal a weak trend?

A. The finance minister has reiterated a number of times that he intends to stick to 4.1 per cent. I don't see any reason to question that intention. Of course, accidents can happen. There is always uncertainty. My sense, and our belief, is that fiscal deficit will be met.

Q. Does a higher than 3.6 per cent fiscal deficit target for next year (2015-16) worry you?

A. We are not fixated on particular numbers or particular actions. The government is going to decide what the appropriate package would be. It will put forward the package keeping in mind the effects of growth, inflation, etc. At this point, we will look at what the package is and whether we should get worried about inflationary consequences, or get reassured about fiscal consequences. So, I am not going to say that if 'A' does not happen we will be worried.

Q. You had recently talked about India requiring more institutions to ensure deficits stay within control. Will you elaborate on it?

A. This is more a thought, or sort of public rumination, on the number of countries having independent bodies that look at the Budget. They do not formulate the Budget, but once it is formulated, they express their views on what the consequences would be and how they add up. For example, if a new pension is postulated, the Budget will basically say here is the cost of pension for the year. But what will be the cost, over time, if it has to cover the target population? And, as the population grows, and the real value of the pension grows, as typically is the case, what will then be the cost of the entitlement. In the US, for example, the Congressional Budget Office pushes forward the schemes and see how the short fall can be made up. Similarly, in Germany, there are budgetary bodies that look at the Budget and say whether it is of high quality or low quality. Are the numbers believable? Are the projections reasonable, given growth, inflation, etc. They come up with reports and analysis and place it before the Parliament. This may be useful.

Q. Is there an agreement on the formation of the monetary policy committee?