‘Holding cos will separate promoters from banks’

‘Holding cos will separate promoters from banks’

NEW DELHI: Sachin Chaturvedi wears many hats. He is the director general of think tank RIS and is also on the RBI’s central board. He was also part of the internal working group (IWG) set up by the RBI to revisit bank licensing norms. In an interview with TOI, he explains the thinking behind the recommendations. Excerpts:
A lot of attention is currently focused on the entry of the corporate sector into banking. Did you expect this kind of a reaction?
The reactions are on two or three different planes. One is focusing on the entry of large corporate houses. There are quite a few reactions that are welcoming the new scope for capital infusion in the banking sector, they are welcoming the efforts on enriched regulatory architecture and they are also trying to bring out the fact that the report has not just covered the architecture for universal banks but also the mechanisms needed for differentiated banks like small finance banks and payments banks.
There is a need for a mix of institutional architecture and governance models to deliver what is required. The regulatory architecture should reflect the new realities emanating out of the rise of new technologies in the financial sector and the plurality of new actors in the realm of finance require changes in the Banking Regulation Act.

A ex-RBI governor, a former deputy governor, two former CEAs chief economic advisers and a former finance secretary are among those who are critical about the entry of corporate houses… and have concerns around regulating them and also the global experience. How do you view it?
We shouldn’t completely overlook what has been existing in India. Entry of private banks will not happen for the first time with this report. This has been the case since 1993. The provisions and requirements of various rounds of licensing have not been uniform. They reflect regulatory preferences of those times. Harmonisation across those guidelines is important, particularly when there is a new confidence for a $5-trillion economy and a new buoyancy in the economy.
After 1993, the efforts to strengthen and regulate the private sector banks were made in 2001 and later in 2013, when we talked about the NOFHC (Non-Operative Financial Holding Company) to support the banking structure. In 2016, we made an effort to further insulate it and bring it forward to improve delivery. The IWG report is clear that a holding company structure is a desired format to achieve the necessary ring-fencing objectives. This should be sustained as the NOFHC would insulate the credit giving institution from those who are availing it.
What we have tried to do is say that private banks are welcome but should be properly regulated. We have suggested two tracks — to strengthen the regulations and bring it through the law. Provision for NOFHC was through RBI guidelines and we have suggested that the RBI should work with the government to ensure that the tax provisions treat the NOFHC as a pass-through structure.
How do you safeguard corporate houses promoting a bank lending to its own group companies?
There are several areas which we have focused on. We have suggested revisiting the fit-and-proper criteria. We have said that financial conglomerates getting into banking should have a structure of NOFHC to come through and that companies should be regulated through RBI guidelines and necessary legislative framework. Third, the other entities of the conglomerate should not be in a similar area of business. Fourth, there should be prior RBI approval for any transactions that have to take place in the same entity. Fifth, there are suggestions to ease the regulatory structure for NBFCs to become banks and for banks to have an exit option.
For equity dilution, we have proposed structures where we do not disincentivise those who are venturing into setting up a bank. But once they are there accountability should not be compromised. So, the sixth suggestion is the timespan for dilution and capping of voting rights and listing requirement. Seventh is not just redefining fit and proper criteria but also defining the base capital. These steps are clearly defined and there is no attempt to dilute the regulatory architecture. In fact, what we have suggested is the strengthening of them with maneuvering space for various financial actors.
Are these sufficient safeguards given RBI’s supervisory history, from PNB to IL&FS and Yes Bank?
Certainly. The legislative enabling process that we have suggested, the strengthening of the supervisory role and leveraging of IT are some of the areas which are dealt at length in the report. At different levels, how the group entities are transacting among themselves, how the transition is happening and in what manner NOFHC are being leveraged.
How business houses are permitted, what kind of capital is required is largely dealt with in the report. I don’t think the report has missed out on issues and it has robust recommendations on regulation and supervision. We have followed Pillar III of the Basal Guidelines for widespread disaggregated shareholding structure.
Since you are also on the RBI board, what is the kind of timeframe that is envisaged for new licences?
Difficult to say. The IWG recommendations are on the table, and if they are accepted, it would require going through a legislative process. Probably not before a year or so may be by 2022.
Source From : Times Of India

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