Banks face higher capital norms for PE, VC funds

The Reserve Bank of India (RBI) will set strict terms that may include additional capital requirements for banks managing large private pools of capital.

RBI Deputy Governor Usha Thorat said on Wednesday that where a bank lends its name directly or indirectly or floats/manages large private pools of capital, there is need for additional capital requirements to take care of reputation, concentration and other risks not captured in the traditional framework.

“This is the reason why we are looking at bringing out guidance on banks managing large private pools of capital,” she said at the banking summit organised by the Indian Banks’ Association.

There is, however, no proposal to prescribe special conditions when bank investments are below a threshold and less than 20 per cent of the fund or does not lend its name. Such investments have to be within the overall capital market exposure limit and capital norms, she added.

RBI had earlier flagged the issue of risk for State Bank of India plans for an infrastructure fund, as well as investments in its existing venture fund. Several banks such as Canara, ICICI Bank and Axis have venture capital and private equity arms.

Hinting that banks may need to make higher provisioning for bad loans, Thorat said there is a case for setting aside profits in good times, which can be used in a downturn. “Making forward-looking provisions as is being considered at the Basel level is extremely important for a country like India,” she said.

Thorat also took ahead the agenda of freeing interest rates by saying that the central bank is exploring the possibility of deregulating savings account deposit rates.

"Deregulation of interest rates is an issue, which is on the radar of RBI. A working group is being set up to debate the issue and draw conclusions," she said.

The move to free bank savings rates is part of a wider aim to do away with administered interest rates — like those on Public Provident Fund and post office monthly savings schemes — and linking them with market rates. Currently, depositors earn a fixed 3.5 per cent on savings account deposits.

RBI had earlier said that the administered interest rate structure of small savings acts as a floor for deposit interest rates. This prevents banks from reducing lending rates exclusively on monetary policy cues, thus hurting transmission. "Ultimately, we should really go by the criteria of whether this is going to really help people coming into the system," Thorat said.

In July, the government set up a panel to review the structure, interest rate, tenor and other administrative matters of the National Small Savings Fund. The panel is headed by RBI Deputy Governor Shyamala Gopinath and will review the operations of small savings schemes and recommend ways to make them more market-linked and flexible.

Thorat said low-cost savings accounts provide banks with low cost funds of an enduring nature, which facilitate asset liability management and help lower lending rates. But, banks also have to consider the costs that are not currently recovered in handling such accounts.