Some options for the RBI as it prepares to boost the post-Covid economy | Opinion – analysis
Good news is rarely news. The Reserve Bank of India under Governor Shaktikanta Das showed great calm by pulling YES Bank out of bankruptcy, cushioning the systemic damage of IL&FS and proactively encouraging the changing of the guard at ICICI. Instead of a well-deserved “rest”, RBI is now organizing India’s financial “army” against Covid.
The RBI has to navigate between loan moratoriums to help companies impacted by Covid-19 and ensure that unscrupulous developers do not misuse. The RBI’s guidance on necessary changes to the Bankruptcy and Insolvency Code, debt restructuring processes, and recognition of impairment will be critical in smoothing out Covid-19’s economic disruption.
With a deflationary threat looming over India, RBI has to devise an effective means to finance a stimulus the size of which will overshadow anything seen before.
The RBI will also have to ensure that capital levels in banks remain acceptable, that the PSB mega-merger is successful, and that progress in recognizing NPAs is not wasted. Direct liquidity may need to be provided to NBFC and AMC-MF. The liquidity that has dried up for corporate bonds must resurrect.
RBI will not only have to balance often contradictory priorities and on a gigantic scale, but it will also need to plan to relax and start normalizing the economy. Some additional changes and investments will help keep RBI regulation top-notch.
Renew NBFC monitoring
Governor Shanktikanta Das highlighted concerns related to non-bank financial companies (NBFCs) by announcing improved oversight of the top 50. With almost Rs 20 million in assets, private NBFCs are an important part of credit delivery. Dependence on short-term financing is quite high, and there are concerns about “joint loans” with banks. There is also a significant concentration of size with the larger private NBFCs.
Given the issues of IL&FS, DHFL, and concerns about other prominent NBFCs, the sector needs constant, consistent, and stricter monitoring. It is suggested that all NBFCs with assets of more than Rs 5 billion be considered “banks”. Your supervision, monitoring, etc. it must reside with RBI’s banking supervision team, and they would have to comply with prudent rules around capital adequacy, cash reserves like normal scheduled commercial banks. Such NBFCs should also, subject to their compliance with other RBI criteria, receive a 12-month fast track to become a bank.
Simultaneously, there is a need to reduce NBFC categories. The fundamental risks for NBFC “loans” are the same: credit and operational risk, liquidity, capital adequacy and governance. Once we move the “big” NBFCs to the bank, the rest can be treated as one, although differentiated between the deposit taking and the non-deposit taking. This will reduce the burden on RBI and improve supervision.
Modernization and simplification of supervision.
RBI supervision and risk control continue to rely heavily on data presented by financial institutions. There has been a focus on static rather than dynamic data. Combined with scheduled inspections, this can allow industry players to camouflage deficiencies in their operations. A positive change has been the stakeholder discussions initiated by the RBI, forcing greater attention to corporate governance. It is necessary to simplify the amounts of static data, often unusable, that is sent to the RBI, where the data metrics become more important than the underlying risk.
Going beyond the numbers, simplified supervision could reduce data points, but add emphasis on contingency planning, stress testing, and “directional” indicators on balance sheets. To help with this, the RBI needs access to the most up-to-date data mining technology. You need to be able to extract data, on short notice, from the central banking systems of financial institutions. Technology can be used to signal problems, eg. Eg changing exposures for perennial, undisclosed group relationships between borrowers, storefronts, etc. Some work has started, but this must be accelerated. RBI needs an ongoing commitment to the largest financial institutions for problems to be identified early. You have to be better able to proactively examine warning signs (like the ones IL&FS had issued for years) through targeted surprise inspections.
Re-visit the “payment” banks
Although the announcement of payment banks attracted a lot of attention, their real usefulness and their contribution to the financial system, in terms of inclusion or improvement in transaction efficiency, is questionable. Progress in payment technology has made them almost redundant. Perhaps we can allow them to easily close or merge with existing banks. This can ease the supervisory burden on RBI.
Empower regional offices.
India’s financial sector is too complex to be supervised mainly from Mumbai. Regional offices need more freedom and role in the oversight of local financial institutions, as well as the regional operations of national financial institutions. Like the Federal Reserve, regional offices must have formal input on monetary and regulatory policy issues, adding flavor and regional priorities.
As the RBI directs the financial response to COVID, it needs to be given the right tools to deal with the increased complexity and scale of modern banking regulation.
(Saket Misra is an international investment banker)