RBI to explore interest-free banking

To release draft guidelines on wholesale banks, differentiated banks in September

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In order to improve financial inclusion in the country, the Reserve Bank of India (RBI) is now looking at exploring the possibility of introducing interest-free banking in the country.

“Some sections of the Indian society have remained financially excluded for religious reasons that preclude them from using banking products with an element of interest. Towards mainstreaming these excluded sections, it is proposed to explore the modalities of introducing interest-free banking products in India in consultation with the government,” said the central bank's annual report released on Monday.

In the interest-free banking regime, instead of extending cash loans, the lender buys and leases the product for which a loan is required and in turn earns rentals on it. Islamic banking is also based on the same principle and some foreign lenders such as the National Development Bank, among others, have been in dialogue with the regulator to allow them to introduce an Islamic Bank in the country.

These lenders believe that this form of banking can help in providing credit, especially to the sections that fall within the small and medium enterprise segment that banks may not be very comfortable in lending to due to either the credit risk involved, or the small quantum of loans.  

Apart from this, the central bank is all set to issue draft guidelines for other niche banks such as custodian bank and wholesale banks by next month.

“The possibilities of licensing other differentiated banks such as custodian banks, and wholesale and long-term financing banks, will be explored in a paper to be released for comments by September 2016,” said the report.

The introduction of these niche banks were recommended by Nachiket Mor, a member of the central board of RBI.

In his report, Mor had emphasised the need to move away from the universal banking model, in which a bank offers all financial products and services and has to meet all regulatory mandates and priority-sector obligations, to specialised banks in a differentiated licence framework. This comes almost a year after RBI issued in-principle approval to 10 small finance banks and 11 payments banks.

RBI-Irdai might bring insurance cos under CRILIC database

In a bid to improve the reporting of bad loans across the financial system, RBI has initiated a dialogue with the Insurance Regulatory and Development Authority of India (Irdai) to ensure that even insurance companies report latest data on big borrowers, including defaults through the Central Repository of Information on Large Credits (CRILC).     

CRILIC, which became functional in FY15, ascertains that banks and non-banking financial companies (NBFCs) need to furnish credit information on borrowers, who have an aggregate fund and non-fund based exposure of Rs 5 crore and above. This centralised database allows the banking regulator as well as the lender to have access to the bad loans of corporates in the system.

“During the year, there were discussions between the Reserve Bank and the Insurance Regulatory and Development Authority (IRDA) for bringing insurance companies into the ambit of the CRILC system. A training programme for five insurance companies was also conducted to familiarise them with the system,” said the report.

This comes after Life Insurance Corporation of India (LIC), the country’s largest insurance company, has been reporting a steady increase in bad loans. According to LIC’s 2014-15 annual report, its gross non-performing assets — that stood at 3.3 per cent at the end of March 31, 2015 (Rs 12,230 crore) of its total debt — had risen to 4.23 per cent as of December 2015.