Looking back: 10 developments that shaped the financial sector in 2021

From crypto concerns to policy normalisation, deposit insurance, Shaktikanta Das' reappointment as RBI governor and Citi's India exit, here are the key developments in for the financial sector in 2021

The year 2021 started with a lot of uncertainty for the financial sector, especially commercial banks, which were unsure how the loan moratorium and restructuring in the wake of the Covid-19 pandemic would play out. There also were concerns around the monetary policy framework, with nobody sure how long the ultra-loose policy would be pursued.
 
Let’s take a look at the top 10 developments that shaped the financial year in 2021:
 
1. Policy normalisation
 

The year 2021 saw the central bank slowly winding down its ultra-loose monetary policy, tightening liquidity at the shorter end. The dispensation on account of a lower cash reserve ratio (CRR) was no longer available; bond purchases under the Government Securities Acquisition Programme (GSAP) had stopped.

 
The stage is now set to walk the normalisation path, with a reverse repo rate increase which could take place as early as in February 2022 – the first policy review of the year – provided the concerns around the Omicron variant of coronavirus do not linger on.
 
2. Cryptocurrency concerns
 
A Bill on cryptocurrencies was expected to be introduced in the winter session of Parliament. It was not clear whether the Bill would propose to ban such virtual currencies or set the rules to regulate them, but the central bank had strong reservations. RBI Governor Shaktikanta Das publicly took a stand against cryptocurrency, citing macroeconomic and financial stability risks. Eventually, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, was not introduced in Parliament during its winter session.

 
3. Deposit insurance
 
Amid a crisis at Punjab and Maharashtra Cooperative Bank, and efforts towards its reconstruction, the Union Budget increased the deposit insurance limit to Rs 5 lakh from Rs 1 lakh. The move was seen as a big relief for depositors whose money had been stuck in banks under RBI restrictions, mainly cooperative banks. One lesson for retail depositors was that they should not put all their savings in one bank. Ideally, they should not keep more than Rs 5 lakh in any one bank. The draft scheme of amalgamation of PMC Bank, announced last month, proposed a haircut on retail deposits.

 
4. PMC resolution
 
The resolution of PMC Bank itself was a major development this year for a number of reasons. First, not many cooperative banks bounce back after being put under RBI restrictions; most of them are liquidated and depositors lose their money, except for the insured amount. For PMC, the depositors will get their entire principal amount, albeit over a period of time – those who have more than Rs 5 lakh in the bank – according to the proposed scheme of amalgamation with Unity SFB. High-value depositors will not be paid any interest for the first five years. In the following years, the interest rate will be 2.75% – that is less than what many banks offer on savings account deposits. Clearly, retail depositors are taking a haircut – again a first in recent years. In the case of the two troubled banks that have gone for reconstruction in recent years – YES Bank and Lakshmi Vilas Bank – depositors have not had to take any haircut. Is PMC resolution a template for dealing with bank failures in future? We will wait and watch.

 
5. Reappointment of Shaktikanta Das
 
RBI Governor Shaktikanta Das, who was appointed in 2018 for three years after his predecessor resigned abruptly amid a strained relationship between the government and RBI, completed his first term on December 12. Almost a month before his first term ended, the government reappointed Das for another three years. Should he complete his second term, Das would become the longest-serving RBI governor in seven decades. Das’ reappointment is important since he has to navigate an exit from an extremely accommodative monetary policy, which has been in force for almost two years since the outbreak of the Covid-19 pandemic.

 
6. Denying bank licence to corporate houses
 
An internal working group (IWG) of the central bank last year raked up the issue of bank licences to corporate houses – something which the banking regulator had been avoiding for a long time. The working group supported the idea of allowing the entry of big businesses into banking, albeit with caveats to check interconnected or camouflaged lending. There was a growing expectation that the central bank would finally bite the bullet, particularly after private sector banks were allowed to handle government business. However, while accepting 21 or the IWG’s 33 recommendations, the RBI last month left out the proposal to allow corporate houses in banking.

 
7. Asset quality relief
 
Asset quality of Indian banks has started improving since 2018 with a fall in gross non-performing assets (GNPAs). The Covid-19 pandemic, however, threatened to reverse the downward trend in GNPAs. The 22nd issue of the RBI’s Financial Stability Report (published in January 2021) projected that scheduled commercial banks’ gross NPA ratio would increase from 7.5 per cent in September 2020 to 13.5 per cent by September 2021 under the baseline scenario, and to 14.8 per cent under a severe stress scenario.
 
The doomsday projection did not materialise. The next issue of the FSR showed that the ratio till March 2021 stayed at almost the same level as in September 2020. Except for some of the small finance banks, most banks reported improvement in asset quality. Their capital position also improved in the past year.

 
8. The exit of Citi India
 
In April this year, Citigroup decided to exit retail banking in India and 12 other markets, citing lack of scale to compete. Citibank, which has been present in India for more than a century, started its consumer banking business here in 1985. Citi was not interested in operating in India through the wholly-owned subsidiary (WoS) route and continued to operate through branches, even as the banking regulator wanted foreign banks to opt for the WoS route. This became a constraint to Citi’s growth, and hence the decision to exit. Though the exit came as a surprise to many, it was inevitable.

 
9. Card-on-file tokenisation
 
One major consumer protection rule proposed this year was allowing only card-issuing banks and card networks like Visa, Mastercard and Rupay to store customer data. So far, many entities involved in the card payment transaction chain do store actual card details (also known as Card-on-File, or CoF). In fact, some merchants were forcing customers to store card details, the Reserve Bank of India said. The regulator observed that availability of such details with a large number of merchants substantially increased the risk of card data being stolen. Stolen card data could lead to frauds through social engineering techniques. While allowing CoF tokensiaton to only card-issuing banks and card networks, the regulator said all data stored by other entities would need to be purged. The new guidelines, which were scheduled to come into effect from January 1, 2021, have now been postponed by six months, as some players in the payment system are not yet ready for a transition.

 
10. Tightening shadow-bank supervision
 
With non-banking financial companies growing in size and reach in the past few years, an enhanced level of supervision of these entities was in order. Earlier this month, NBFCs were for the first time subjected to the prompt corrective action framework (PCA), just like commercial banks. All deposit-taking NBFCs and non-deposit taking NBFCs with over Rs 1,000 crore of assets will now be under the PCA framework starting October 1, 2022, on the basis of their financial position on or after March 31. Capital, leverage, and asset quality are the triggers for imposing the PCA. When an entity is put under the framework, it means the entity would face restrictions on several fronts – like branch expansion, dividend distribution, reduction in exposure to high-risk sectors to conserve capital, asking promoters to infuse capital, among other things.