Some options for the RBI as it preps to kickstart post-Covid economy | Opinion
Good news rarely makes the news. The Reserve Bank of India under Governor Shaktikanta Das displayed great calmness in pulling YES Bank away from bankruptcy, buffering the systemic damage from IL&FS and proactively encouraging change of guard at ICICI. Instead of a deserved “break”, RBI is now marshalling India’s financial “army” against Covid.
The RBI has to navigate between moratoria on loans to help businesses impacted by Covid-19, and ensuring that unscrupulous promoters do not take undue advantage. The RBI’s guidance on changes needed to Insolvency and Bankruptcy Code, debt restructuring processes and recognition of impairment will be critical to softening the economic disruption from Covid-19.
With a deflationary threat hanging over India, RBI has to design an effective means of funding a stimulus whose size will dwarf anything seen before.
The RBI will also have to ensure that capital levels at banks remain acceptable, that the giant PSB mega merger succeeds, and progress made in recognising NPAs is not frittered away. Direct liquidity may need to be provided to NBFCs and AMC-MFs. Liquidity that has dried up for corporate bonds needs to be resurrected.
Not only will RBI have to balance often contradictory priorities and on a gigantic scale, they will simultaneously need to plan for the unwind– to commence normalisation of the economy. Some changes, and additional investments will help keep RBI’s regulation top notch.
Revamp NBFC supervision
Governor Shanktikanta Das highlighted concerns related to the non-bank financial companies (NBFC) while announcing enhanced supervision of the largest 50. At nearly Rs 20 lakh crore in assets, private NBFCs are an important part of credit delivery. The reliance on short-term funding is quite high, and there are concerns about “co-lending” with banks. There is also a significant size concentration with the largest private NBFCs.
Given IL&FS, DHFL issues and the worries about other prominent NBFCs, the sector needs constant, consistent, tighter monitoring. It is suggested that all NBFCs with assets more than Rs 5,000 crore be “deemed banks”. Their supervision, monitoring etc. should reside with RBI’s banking supervision team, and they would need to comply with prudent norms around capital adequacy, cash reserves like normal scheduled commercial banks. Such NBFCs should also, subject to their meeting other RBI criteria, be given a 12-month fast-track into becoming a bank.
Simultaneously, there is a need to reduce the categories of NBFCs. The fundamental risks for “lending” NBFCs are the same – credit and operational risk, liquidity, capital adequacy and governance. Once we move “large” NBFCs into banking, the rest can be treated as one – albeit differentiated between deposit and non-deposit taking. This will reduce the load on RBI and improve supervision.
Modernising and simplifying supervision
The RBI’s supervision and risk monitoring remains fairly reliant on data submitted by financial institutions. There has been a focus on static rather than dynamic data. Combined with scheduled inspections, this may allow sector players to camouflage shortcomings in their operations. A welcome change has been discussions with stakeholders started by the RBI – forcing greater attention on corporate governance. There is a need to simplify the reams of static, often unusable, data that is submitted to the RBI – where data metrics become more important than the underlying risk.
Going beyond numbers, simplified supervision could reduce the data points but add emphasis on contingency planning, stress tests and “directional” indicators on balance-sheets. To help with this, the RBI needs access to the most updated data-mining technology. It needs to be able to pull data, at short notice, from the core-banking systems at financial institutions. Technology can then be used to red-flag issues e.g. shifting exposures for evergreening, undisclosed group relationships between borrowers, window-dressing etc. Some work has started, but this needs to be accelerated. RBI needs ongoing engagement with larger financial institutions so that problems are identified early. It needs to be further empowered to proactively examine warning signals (such as the ones IL&FS had emitted for years) through surprise, specific focus inspections.
Revisit ‘Payment’ Banks
While the announcement of Payment Banks grabbed a lot of attention, their real utility and contribution to the financial system – in terms of inclusion or improving transactional efficiencies is questionable. Progress in payments technology has made them almost redundant. Perhaps we can allow them to close down or easily 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 primarily out of Mumbai. Regional offices need greater leeway and role in supervising local financial institutions, as well as regional operations of national financial institutions. Like the Fed, regional offices should have formal inputs into monetary and regulatory policy issues, adding regional flavour and priorities.
As the RBI leads the financial response to COVID, there is a need to give it the right tools to cope with the greater complexity and scale of modern banking regulation.
(Saket Misra is an international investment banker)