2024 set to be eventful for North Block, RBI in pursuit of $5 trn goal

Mint Road’s Internal Working Groups (IWGs) review of the extant ownership guidelines and corporate structure for private banks will be in the spotlight.
 

The IWG had on November 20, 2020, made a case for large corporate and industrial houses as promoters of banks. And that large non-banking financial companies (NBFCs) with an asset size of Rs 50,000 crore and above, including those owned by corporate houses, may be considered for conversion into banks.
 

So, are we to see forward movement on this front?
 

The Reserve Bank of India (RBI) while accepting 21 of the IWG’s 31 recommendations had said “the remaining recommendations are under examination” in its press release of November 26, 2021. This was read by private bank licence hopefuls that the issue was still open.

A bank licence for industrial houses looks unlikely; the IWG itself had referred to concerns over connected lending and exposure between banks and other financial and non-financial group entities, and the need for strengthening the supervisory mechanism for large conglomerates, including consolidated supervision.
 

But large NBFCs are more hopeful. Reasons: A four-tiered scale-based supervisory architecture is in place; shadow bank regulations are as strict as for banks. The grapevine has it that a few large NBFC are once again weighing their bank licence ambitions now that the merger of the HDFC twins is through. Yet another variable in the plot is the curbs placed on bank funding to them. Simply put, there’s a lot at stake on this front for NBFCs.

The trigger for setting up the IWG was “in alignment with the agenda set for the economic growth of the country to become a $5-trillion economy, there are heightened expectations for the banking sector to scale up for a greater play in the global financial system”. It was in this context that the RBI initiated the process for a comprehensive review of the extant guidelines on licensing and ownership for private banks. 

In search of resolution
 

How will Mint Road address the issue of regulated entities’ (REs’) exposure to alternate investment funds (AIFs)?

The central bank on December 19 noted that certain transactions of REs involving AIFs have raised regulatory concerns. These entail the substitution of direct-loan exposures of REs to borrowers, with indirect exposures through investments in units of AIFs. From here on, REs shall not make investments in AIFs with downstream investments — either directly or indirectly in a debtor company of the RE. Such exposures are to be unwound; and on not being able to do so within the specified timeframe, REs are to make 100 per cent provision on such investments.

It is unlikely that the RBI will budge from its position despite the hue and cry on exposure to AIFs. The issue is the evergreening of loans. On May 29 last year, Governor Shaktikanta Das had flagged it in his speech on ‘Governance in Banks: Driving Sustainable Growth and Stability’. “We have also come across a few examples where one method of evergreening, after being pointed out by the regulator, was replaced by another method. Such practices beg the question as to whose interest such smart methods serve. I have mentioned these instances to sensitise all of you to keep a watch on 

such practices.”

AIFs raised around Rs 3.7 trillion by the end of June 2023. Through their intermediation role they perform a useful economic function, but AIFs, like other private credit vehicles, are subject to less regulation than REs. The RBI’s concern is to take care of its REs and the inter-connected aspect – the primary fuel for this being bank deposits. So, where does this place AIFs after the RBI’s diktat to REs? Let’s put it this way: AIFs are regulated by the Securities and Exchange Board of India; maybe, AIFs should look to tap the bond markets rather than at the RBI’s REs for funding.

The action has just begun.

Will UPI continue to be free?
 

Recall these sentences: “In any economic activity, including payment systems, there does not seem to be any justification for a free service, unless there is an element of public good and dedication of the infrastructure for the welfare of the nation. But who should bear the cost of setting up and operating such an infrastructure is a moot point.” These are from the RBI’s “Discussion Paper on Charges in Payment Systems” released on August 17, 2022. 

While the paper did not specifically mention the Unified Payments Interface (UPI), days later, North Block tweeted that UPI is a digital public good with immense convenience for the public and productivity gains for the economy. And, therefore, “There is no consideration in the government to levy any charges for UPI services. The concerns of the service providers for cost recovery have to be met through other means,” it said.
 

While it may be farfetched to assume that UPI will cease to be free, the issue has been engaging the payments industry for years now and has figured in talks with the RBI (without correct pricing, just about everybody in the payments ecosystem is under pressure.) But it could be that the pricing of digital modes of payment will get a fresh look.

Take the merchant discount rate (MDR) – the structure that decides what each entity in the payment services loop gets to pocket on a transaction (if there’s nothing by way of an MDR, the ecosystem starves). A zero-MDR regime was introduced on Rupay-UPI debit cards in the July 2019 Union Budget on transactions of up to Rs 2,000. There’s a demand that this be linked to the merchant turnover instead of a flat exemption on ticket sizes of up to Rs 2,000 at all outlets.

This would have given relief to smaller merchants; larger outlets should have been made to absorb MDR as they could afford to do so. Neither the Nandan Nilekani Report (2019), nor the Watal Committee (2016) made a case for zero-MDR but said this should be left to market forces.

A re-look at the Acts
 

In the Union Budget for FY24, Finance Minister Nirmala Sitharaman spoke about the need for better governance and investor protection in the banking sector. To this end, Sitharaman had proposed certain amendments to the RBI Act, 1934; the BR Act, 1949; and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. Senior bankers expect this to be taken up in earnest once the results of the general election are clear, and a new government is sworn in. The RBI, on its part, has been cracking on the governance aspect. 

Moves on the re-look of the key Acts will have to be read together with the widely expected clarity on the earlier mentioned recommendations of the RBI’s IWG to review the extant ownership guidelines and corporate structure for private banks. Expect a North Block-RBI jugalbandi.