Governance to groundwork for digital biz, the year that was 2021 for RBI

2021 will go down as the year in which the central bank undertook long overdue governance initiatives even as it laid the groundwork for the fast-growing digital business

Behind the smile

In January this year, Shaktikanta Das said “ensuring good governance structure constitutes the first line of defence on financial stability. An effective early warning system is necessary. Risk management in banks and non-banking financial companies (NBFCs) should evolve with changing technology and international best practices”. The Reserve Bank of India’s (RBI’s) governor was delivering the Nani Palkhivala Memorial Lecture. In April, private banks got a taste of his medicine. The RBI capped the maximum term for bank corner-room occupants at 15 years and set the age limit at 70. It also issued guidelines that recast the way the nomination and remuneration committee, and audit committee were drawn up and functioned. Later in November, he referred to the fact that the business models of some banks were under scrutiny, and that they should eschew high-stake strategies. Now think about this one: Have you ever come across a photograph of Das where he is not smiling?

… No break for NBFCs

Last week, the RBI extended the prompt corrective action (PCA) framework to shadow banks. It said that these entities have been growing in size and have substantial inter-connectedness with other segments of the financial system. Accordingly, the central bank decided to put in place a PCA framework for them to further strengthen the supervisory tools applicable to NBFCs. It is to be effective from October 1, 2022, based on the financial position of NBFCs on, or after end-March 2022.  It is possible that a clutch of NBFCs may qualify for a banking licence, but for many of the entities below the top-tier, it may be sackcloth and ash!

Oh, the cost of compliance

All central bank regulated entities with an asset size of Rs 15,000 crore have to go in for a joint audit — two firms. And an audit firm can only take on four banks, eight shadow banks and eight urban co-operative banks in a year; this aspect has nothing to do with the size of the audited entity. For regulated entities, the move bought its share of headaches. Not many audit firms have what it takes to do complex audits in the financial sector; and a few large institutional shareholders also sounded out the Securities and Exchange Board of India over the fact that the quality of audits may suffer. From a business standpoint, it also irked the big four — Deloitte, KPMG, PwC and EY. But on the brighter side, in one fell swoop, the banking regulator opened up the trade for the smaller audit firms in the country to learn and grow. Atmanirbhar, you see.

Will the door open at all?

Large corporate groups may have felt let down by the RBI’s decision to maintain the status quo on their entry into banking. This is despite the fact the banking regulator has neither accepted nor rejected the proposal of an Internal Working Group (IWG) of the RBI that large corporate houses be allowed to promote banks “only after necessary amendments” to the Banking Regulations Act (1949). But the RBI accepted 21 out of 33 recommendations of the IWG even as it offered no comment on the issue of granting banking licences to corporate houses.

Last week, Deputy Governor Rajeshwar Rao made the first official follow-up comment on the subject. “Banking is a highly leveraged business dealing with public money, it makes sense to keep industry/business and banking separate. This separation is expected to avoid spillover risks — where trouble anywhere in the group entity may result in transferring risks on to the depositors, leading in turn to claims on deposit insurance with subsequent ripple effects cascading across the largely interconnected financial systems, creating concerns around financial stability.” And concluded with, “Let me just say that the jury is still out on the issue.”

Taking away the punchbowl

The buy-now-pay-later (BNPL) business will not be the same anymore. The —Report of the Working Group on Digital Lending has pointed out the difference between balance-sheet lending (BSL) and market-place lending (MPL). BSLs are in the business of lending, who carry the credit risk on their balance sheet and provide capital for such assets and associated credit risk, generated organically, or non-organically. MPLs are those who essentially perform the role of matching the needs of a lender and borrower without any intention to carry the loans in their balance sheet. While peer-to-peer lending is a clear example of MPL, many other players who are in the business of originating digital loans, (Fintech platforms or the so called “neo banks” or BNPL players) with the intention of transferring such digital loans to BSLs, can also be bracketed with MPLs. The Group is of the view that BNPL players should be treated in the BSL universe, and that the RBI should encourage creation of more digital-only NBFCs and lay the groundwork for digital-only banks.

And at the till

The automated teller machine (ATM) channel continued to get step-motherly treatment. The inter-change — what issuing banks pay when customers swipe on other banks’ ATM— continues to be a sore point. The move this June to hike the inter-change to Rs 17 from Rs 15 for financial transactions (and to Rs 6 from Rs 5 for non-financial transactions) is not a breather. This hike to Rs 17 is lower than the Rs 18 pegged a decade ago. Costs have soared since demonitisation — due to the recalibration of ATMs, reworking vendor-agreements with managed service providers, and cash-in-transit firms. Deployments have crossed 2,50,000 units after hovering at 2,25,000-2,35,500 levels for almost five years. But with the imposition of Rs 10,000 fine every time an ATM goes dry from October 1, it could lead to the shuttering of scores of ATMs.