A review of banking regulations that could update the bank

Mandatory fundraising via bonds: With the intention of expanding the bond market and reducing corporate dependence on bank financing, large entities rated AA and above have been asked to source 25% of their additional financing needs through obligations. Recent data from the central bank and the Securities and Exchange Board of India (Sebi) corroborates that the country’s overall bank lending pie has declined for creamy, well-rated companies.

Along with the decline in capital investment due to low capacity utilization in the economy and the resulting low use of credit, commercial banks have been forced to lower the credit quality curve and lend to loans. riskier ventures, which is a worrying unintended consequence of the aforementioned policy.

ORR and regulators should extend the bond market fund-sourcing benefit to all good quality companies and also consider a gradual relaxation of the stipulated 25% reservation mandate to ensure a level playing field for all the participants.

Business current account closures: To prevent unscrupulous promoters from embezzling funds through multiple accounts and instilling credit discipline, the RBI had placed restrictions on customers’ current account transactions and ordered banks to close those accounts if their exposure was less than 10% of clients’ overall borrowing facilities. The move hurt clients who lost top services from smaller but more efficient private and foreign banks, while lenders lost good deals. Even public sector banks (PSBs) have been affected, as they would be required to cede the accounts of government entities if no RBI easing is forthcoming.

While the regulatory intent is benign, it created a messy result. The RRA could suggest better mechanisms for digital information sharing and monitoring between banks to enforce credit discipline, even if companies are allowed to manage multiple checking accounts.

Rethinking Poorly Written Guidelines: The data localization circular, first published in April 2018, for example, was tailor-made for payment entities and so vague that RBI had to issue detailed clarifications, confirming that multinational banks were well covered.

Likewise, another contentious circular requires all banks operating in India, not only domestic but also foreign – whether they are small banks with only a few branches or larger ones making 100 times local income – to be generated automatically. data on non-performing assets with locally mandated supply coverage. This applies even if a particular bank has a conservative overall policy that requires a higher level of coverage, requiring costly country-specific changes in its overall system architecture.

ORR might consider revising some rudimentary guidelines and circulars.

Priority sector loans: Although the intent of directed credit goals for commercial, cooperative and rural banks is noble, targeted lending in priority sectors can lead to misallocation of capital and poor appraisal of loans. With the increasing disintermediation of credit, conventional banks with high fixed cost structures are increasingly disadvantaged. Be forced to lend ??40 of each ??In favor of low-yielding assets and increasingly risky priority sectors, commercial banks have lost market share in favor of more nimble fintech and non-banking financial firms.

Worsening cost structures and the technological advance of new players could pose viability problems for traditional banks. Urban cooperative banks are considering ways to convert to universal commercial banks to reduce their lending obligations in priority sectors from 75% to 40%, while small financial banks also want to convert to universal banks after 5 years of operations. satisfactory for reasons.

The ORR could revise the lending standards of the priority sectors in order to reduce the targeted sub-targets and the overall targets for the banks and / or lower the credit risk weights on specific short-term and reverse-liquidated bank facilities. For example, reduced risk weights on financing MSME invoices through TReDS exchanges can reduce capital consumption for banks and also improve credit flows in the priority manufacturing ecosystem.

Market challenges: ORR should address evolving technological and business challenges by developing regulatory models that include: a) a digital banking framework for universal and wholesale banking licenses; b) a plan for a central bank digital currency in the form of fiat money; c) a special waiver, put in place jointly with the Center after a feasibility study, which would allow oil companies profit-oriented hedging of the price of crude oil, which, together with tax cuts, could help cool fuel prices in India; and d) a light regulatory policy for launching prescribed banking services by neo-banks, fintech companies, and other technology companies.

The central bank’s RRA 2.0 has its work cut out for it. It should aim to mitigate the harmful effects of past regulations and simultaneously maintain the multiple benefits that derive from existing directives.

Ashiesh Kapoor is a Management Professional, Certified Treasury Director and Corporate Banker.