RBI Distances Itself From Proposal Of Corporate Entry Into Banking
Shaktikanta Das, governor of the Reserve Bank of India (RBI), pauses during an interview at the central bank in Mumbai, India, on Tuesday, March 3, 2020. (Photographer: Kanishka Sonthalia/Bloomberg)

RBI Distances Itself From Proposal Of Corporate Entry Into Banking

The recommendation to allow entry of large corporate and industrial houses into banking was an independent proposal of the Reserve Bank of India’s internal working group, and should not be construed as the central bank’s point of view on the issue, according to Governor Shaktikanta Das.

“The internal working group had two independent members who are part of the RBI’s central board and the group has acted independently of the RBI and has given a certain point of view,” Das said over a video conference call, after announcing the monetary policy committee’s decision on benchmark rates.

A decision on the matter by the RBI, he said, is still pending.

According to the RBI governor, the regulator’s decision-making process is consultative. For now, the working group’s report has been put in the public domain for comments. Once the regulator receives comments from various stakeholders, it will review the proposal and take a final decision.

The internal working group’s report, released last month, had recommended allowing large corporates and industrial houses in banking. It, however, had specified that such decisions should only be taken after the Banking Regulation Act, 1949, is suitably amended and the RBI’s supervisory arm is strengthened. But the proposal invited strong opposition from former central bankers such as Raghuram Rajan and Viral Acharya. Historically, RBI has been against large corporates setting up banks, since it may open the doors for lending to group companies, which is difficult to regulate.

RBI’s Deputy Governor MK Jain, who accompanied Das during the video call, said that over the last two years, the central bank has taken conscious steps to improve its supervisory functions. It had been pushing for stronger IT infrastructure within the supervisory wing, with more focus on data analytics. “We’ve upskilled the supervisory division. We also have a dedicated team that monitors connected entities,” Jain said, adding that the RBI would continue to strengthen its supervision of regulated entities.

The RBI’s supervision department had come under fire after the failure of Yes Bank in March and Lakshmi Vilas Bank last month. According to Governor Das, the situation at these two banks didn’t come up overnight and the regulator was fully aware of their financial position.

“First focus is to always work with the management of banks to resolve the stress. First, the RBI nudges, goads, requests bank management to resolve the problem. We only intervene if we feel it is necessary in the interest of the depositors,” Das said.

As part of its regulatory agenda for the coming months, the RBI is reviewing the regulatory framework for non-banking finance companies, Das said.

Also Read: BQ Exclusive: Is Corporate Entry Into Banking Being Suggested To Help Only A Few, Asks Raghuram Rajan

In the statement of developmental and regulatory policies released on Friday, the RBI said it was looking to implement a scale-based regulatory framework for NBFCs, since the sector has companies with varying sizes. A uniform regulatory policy may not adequately cover all companies, Das said. A discussion paper in this regard would be released soon.

Also Read: Corporates In Banking: Debate Overhaul Of Supervision And Enforcement First

Besides, the RBI is closely monitoring the bad loan conditions across the banking sector, in view of the Supreme Court’s interim order to not downgrade any account to non-performing category after Aug. 31 till further instructions. The RBI has been conducting an internal assessment of the true asset quality conditions of the banking sector and would be releasing its findings in the last week of December, when it releases its half yearly financial stability report, Das said.

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