The Reserve Bank of India (RBI) is looking at “shadow banking” activities closely and will tighten regulations if needed.
“Next on the agenda is increasing the surveillance on shadow banking,” Anand Sinha, deputy governor of RBI, said on Monday while addressing a meet organised by the Associated Chambers of Commerce and Industry of India. Shadow banking refers to financial sector services beyond the active regulatory purview of central banks.
According to RBI, the unprecedented increase in shadow banking was a reason for the global financial crisis of 2008. Sinha added the central bank might tighten regulations if required.
Strengthening regulations on such businesses are being addressed in the Basel-III norms, proposed to become applicable from 2017-18.
Lately, non-banking finance companies (NBFCs) have attracted the central bank’s attention for various reasons. Sinha said, “We are pro-NBFC, but it being essentially a part of the shadow banking system, it has to be tightened under Basel-III norms.”
On capital adequacy under Basel-III, the deputy governor said while tough requirements were substantial, the incremental capital needed was not unusually large for Indian banks. RBI had released draft guidelines on Basel-III norms for Indian banks on December 30, 2011. The final norms are expected shortly, Sinha said on Monday.
According to the draft, banks would get time up to March 2017 to meet capital adequacy norms. He said, “Basel implementation has been made longer to ensure least disruption, as banks’ earnings are likely to come under pressure due to the higher capital requirements.” Banks would need to raise productivity to protect return on equity, he noted.
The deputy governor said the asset quality of banks was expected to improve, as the rise in non-performing assets may have peaked. Banks should allow restructuring of loans only after due consideration and analysis, he said.
On the recent change in several Indian banks’ rating outlook by Standard and Poor’s, he said: “They have cautioned us; we were aware of these factors.”
RBI has set up a committee to look into ways of developing a fixed rate loans model in the current interest rate environment.
Sinha said, “A variety of fixed interest rate loan products are imperative, considering that currently banks offer fixed rates on deposits and mostly floating rates on home loans, which expose borrowers to uncertain rate movements.”