India’s banking regulator seems to have tuned in once again to “the changing times” of American singer Bob Dylan.
In the span of a week, the Reserve Bank of India (RBI) has not only allowed a foreign bank to buy a private sector bank and thus gain more presence in India, but is now also thinking of opening the doors of banking to large conglomerates. . What’s more, large non-bank finance companies (NBFCs) should become mainstream banks.
These are two of the many recommendations made by an internal task force. These recommendations have certainly been made in the past as well. But the RBI has so far avoided being too lenient in granting banking licenses. In the last round of universal banking licenses six years ago, only two candidates made the cut and neither of them was a large conglomerate.
However, analysts believe that this time the RBI can really get excited about the idea. The justification is simple. The Indian economy needs large banks promoted by entities with large pockets that can easily finance the needs of the economy. “For a capital-hungry banking sector, the only way is to turn to national developers to grow. I think some of the recommendations are groundbreaking if adopted, “said Abizer Diwanji, partner and national financial services leader at E&Y. Diwanji believes that the RBI may first allow the big NBFCs to turn them into banks. These lenders already have the track record. Some of them also have robust processes that rival those of banks. “We need large-scale loans in India and the NBFCs that become banks will help in this,” Diwanji said. Analysts believe that NBFC shares can win, although these are only recommendations and not rules yet.
While RBI can be softer on NBFCs, it can be difficult to convince to license large conglomerates. To be sure, the task force recommended that licenses be granted only once the Banking Regulation Act of 1949 is properly amended. This can take time. Furthermore, the complex structure of large conglomerates makes it difficult for the RBI to oversee them. “Large corporations may not get licenses soon, because the RBI will first want to ensure governance structures and rigor of oversight,” Diwanji said.
This rigor has been questioned. While the RBI has tightened regulations enough to avoid unpleasant surprises, its supervisors have been unable to detect unreliable transactions. In two years, two big NBFCs and three banks went under. In the end, the regulator has been blamed for waiting too long to bail out a bank or for not fully detecting the problem. But the RBI has started to plug the holes. In recent months, it has created an independent cadre of supervisors and has also strengthened training.
Large conglomerates and NBFCs may find themselves closer to a banking license than before. But the RBI won’t budge until it has all the shields in place.
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