MUMBAI: In a major break from the past, the Reserve Bank under governor Sanjay Malhotra is not averse to testing newer areas hinting the willingness to sail into unchartered waters saying large non-bank finance companies can enter banking provided enough guardrails are put in place.
Existing norms does not allow NBFCs promoted business groups or corporates directly to convert themselves into banks or enter the banking space even though they are eligible to become small finance banks or payment under very stringent eligibility norms.
In a fireside chat at the pink daily Financial Express-organised BFSI summit here Friday, addressing the prospects of large non-banking financial companies entering the banking space the governor said “RBI has a cautiously open approach to the evolving financial landscape”.
Malhotra noted that while NBFCs are eligible to become small finance banks and payment banks, the path is governed by stringent eligibility norms. "NBFCs can become small finance banks or universal banks, but the eligibility criteria for companies and NBFCs are not very different," he said flagging concerns around corporate ownership and conflicts of interest, especially when the same group is involved in both financial and real economy activities.
"While some NBFCs have deep pockets, but, if the same group is doing both financial and real-economy activities, there will be an inherent conflict of interest—these concerns remain," he cautioned. He was also quick to make it clear that there is no proposal on the table of the central bank to allow corporates, whether large NBFCs or not, to have bank licences.
On promoter holdings in banks, he reiterated the RBI policy of allowing up to 100% promoter holding initially, which must be reduced to 26% within 15 years."We would like no individual person to exercise undue control over banks which are dealing with depositor money," Malhotra stressed, adding diversification of ownership is necessary.
While highlighting the importance of not stifling legitimate business aspirations, he said, "we would certainly not like to prohibit any economic activity. It is important for any economic actor to be doing various activities depending on their risk appetite."
However, he emphasised that regulatory oversight will remain a priority. "Our attempt will be to allow activities within the banking sector with proper guardrails," the governor added. On the reforms in the regulatory front, he said RBI has set up set up review cell to consolidate as many as 8,000 regulations so that norms are simplified for better compliance and to enhance clarity.
The review cell will revisit all regulations every five–seven years to weed out obsolete norms and examine if there’s the right balance between efficiency and financial stability, he said.“We’re working towards consolidating more than 8,000 regulations, of which around 5,000 are obsolete or redundant, while retaining and reorganising the remaining 3,000 under a new streamlined framework so that there is better compliance,” Malhotra said.
“Let me make it clear that this is a consolidation of all existing regulations, circulars, and master directions. Our attempt is to come out with one master circular for all banks, and a similar one for NBFCs,” he added.
The purpose is to see whether we have any obsolete regulations, and whether there’s the right balance between efficiency and financial stability. We will also look at regulatory gaps, and examine whether regulations are still aligned with consumer-centricity and evolving financial risks, Malhotra said.
The RBI is in the process of categorising the regulations into 33 thematic subjects, which would help align compliance structures across banks, NBFCs, and other regulated entities.“The broader vision is to simplify compliance, enhance clarity, and remove the duplicative burden on institutions,” the governor said, flagging the pressure created by the growing number of internal compliance obligations.
“There are nearly 100 board-approved policies that every bank must have. This takes up a lot of the board’s time and energy,” Malhotra said. “So, we’re asking, how can we rationalise this so that boards can focus more on strategy and policymaking, rather than administrative overload?”The RBI has already taken steps to reduce complexity in day-to-day compliance.
“We’ve rationalised the number of regulatory returns that supervised entities are required to submit,” he said, adding “all of this is being done to bring simplicity and clarity, and to improve overall compliance outcomes.”The RBI has already put in place a regulation-making framework that includes mandatory consultation and impact analysis.
“What’s the impact of a regulation, from a cost and compliance perspective? While this is something we’ve already been doing, we we’ve now formalised it,” he said.
Meanwhile, while declaring that the RBI has won the battle against inflation, the governor said going forward the monetary policy committee decisions will be guided by the revised forecast numbers rather than current levels.
Price stability will be the primary concern for the central bank amid cooling retail inflation, despite it winning the “battle” against it. Retail inflation came down to a 77-month low of 2.10% in June—lowest on-year inflation after January 2019. The RBI's inflation target falls within 4% with a tolerance for plus or minus 2%.
“The battle against inflation is won, but war continues,” Malhotra said, adding “our primary objective to maintain price stability and we have mentioned that it is not inconsistent with the other objectives we have of growth because that is a pre-requisite.”