In the past 18 months the banking regulator has been fairly active. Number of constraints or disincentives have been imposed on banks; about a couple of months back the savings rate was deregulated, recently the NRI interest rates have been deregulated, 14 months ago the regulator ensured that the banks set aside more NPLs.
In the first year the provisioning went up from 10-15%, in the second year it went up from 20-25% and so on. Now, the regulator has come with more stringent rules for capital. That is, the amount of shareholder capital that should come in against which banks can collect deposits and make loans. That shareholder capital is going to be increased under what are called Basel III norms.
Besides this, there is something called dynamic provisioning that also will kick in which means banks will have to set aside even larger proportions of their profits for a rainy day to back up potential losses, loans that are not being returned.
In an interview to CNBC-TV18, Anand Sinha, RBI deputy governor, shared his view on the initiative taken by the regulator in the banking space.
Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying videos.
Q: You have packed in the last 15 months a whole host of conditions precisely at a time when both the global economy and the Indian economy is going through a rather serious slowdown, does not this bother you?
A: One has to look at it from a different perspective; there is no denying that we are in difficult times. All the measures are supposed to be implemented over a long period of time so that these activities create minimal disruption or little slow down of economic activity as possible. So, there is six years to implement in case of Basel III. Almost 100 simulations had been carried out to check its impact on growth. After completion of vigorous exercise the timeline has been decided.
Another angle to look at is that, how you put the economy back on rails? How you inspire confidence? If because of this stringent situation the banking system is left as it is. Although not in India, we are fairly safe but in the West, despite all these conditions if the banking system is not put back on rails then they will not be able to recover. So, this is the compulsion of the situation. The practicality of this situation demands elongated timeframe.
Q: What will immediately happens from the shareholder point of view like institutional investors and retail investors. If the Basel III norms come immediately in tier II, capital will be less effective, there may not be a market for it and they have to raise more shares and the RoE of banks will get impacted and difficult for them to raise fresh equity. Is that not a worry that RoEs will fall?
A: RoE will certainly come under pressure. You are supporting the same balance sheet with a higher level of capital. The banks can cope with this situation in several ways, but the two most important ways are that they will increase the lending rates and cut down lending and that indeed is bound to happen in the initial stages. But later on, as the banking system is seen to be more robust and moving along the required regulatory path it is hoped that the investor confidence will come back and the investors also look into risk return trade off so they might settle down or rather they would settle down for a lower return on equity.
In the West some banks had return on equity as high as 22% -25% which is unsustainable. This amount of return on equity was a problem at the same time a very depressed return on equity will also be a problem. With time, the banking system will be seen to be more robust. The equilibrium point will return and investor interest will also return. Long-term return on equity in the US and the UK is 8% and 10%. In Europe it is 4-6%. The US has been able to manage as they went in for corrective measures quite soon.
Q: What about the big shareholder, PSBs they are shareholder of the government? With respect to these increasing doses of capital that will be needed not just to support growth but to support the same amount of loans, higher capital are you in touch with the government on the matter and will so much of capital be forthcoming?
A: We have issued our guidelines. The government has also carried out the exercise. The government has to maintain 51% and they have to bring in capital. The FM has said many times that the capital required by public sector banks for implementing Basel III would be provided by the government.
Q: Is there any number with regards to calculations?
A: For public sector banks, equity requirement is up to Rs 143,000 crore till March 31, 2018 and the overall capital requirement is Rs 4,25,000 crore. But, this is a misleading figure as it gives an impression that this capital is required only on account of Basel III which is not correct, because otherwise also capital goods have been required under Basel II. The difference in amount between Basel II nad Basel III is a small figure of Rs 71,000 crore in common equity and the total capital requirement for public sector banks is Rs 1,65,000 crore.
Q: Is it a manageable figure?
A: It is manageable. In totality, it looks a big figure. But let us not only put everything on Basel III.
Q: Equity investments at the moment for subsidiaries is deducted 50% from tier-1 and 50% from tier-2 and now that will become more tier-1. What happens to housing finance companies? They also hold a lot of subsidiaries. On the NBFCs RBI has tightened, but in this third category of HFCs which also are holding companies we have not seen any rules come in. That’s a forgotten area?
A: The housing finance companies are not regulated by us. They are regulated by National Housing Bank. They try to model their regulation around the RBI regulation. But, we must also recognise that while there should be a larger convergence in regulation in order to be able to contain the regulatory arbitrage, but it doesn’t mean that the regulation of non-banking sectors should be exactly identical.
Q: The recent amendments to the banking regulation or the banking amendment bill give RBI fairly big powers. The RBI is asking for powers to regulate not just a bank but all its subsidiaries and associate companies. Does the Reserve Bank have the wherewithal to supervise so much?
A: No. Your view is not what we intent. When are not into regulating the other entities which are within the preview of other regulators. We should be able to call for information from them and if required should be able to inspect but these things work with a protocol.
Q: Is this practically possible? Do you have the staff to get that suspicion and check it up? Is it not much better not to have these kind of new bank licences altogether?
A: That there are fears that there could be self dealing which may be difficult to check. In the guidline we have proposed that there has to be non-operating holding company structure, all financial activities should come under that. We have put limits on how much they can lend to group companies, major customers, suppliers and there has to be a check via a certificate from their statutory auditors for the loans given in excess of Rs 1 crore. We have tried to put in place the check mechanisms and we hope that it will work.
Q: In Indonesia it was disastrous experiment that has to be given up after the Asian crisis so one hopes that things work out better?
A: We have taken lots of effort in devising these safeguards and ring fencing methodologies. One more thing we have put in place, for any capital increase above Rs 1,000 crore one has to take a fresh approval from Reserve Bank to check whether self dealing is being done or not. So for every chunk of Rs 500 crore of capital that they want to infuse in above Rs 1,000 crore. If the banks are sponsored by industrial houses they would certainly want to do it but there will be checks at all stages.
Q: Don’t you think that the new securitisation norms along with the old capital norms might almost cripple NBFC industry?
A: We are not here to cripple any industry and one cannot have banks running the financial system. Every set of institutions that we have are very important for us. We are trying to regulate them in a manner that they work in a prudentially sound basis.
Any regulation looks onerous to regulate. If you know how the NBFC regulations have evolved over a period of time. There was a time when even the deposit taking entities were regulated lightly, and then we went on to complete regulation of deposit taking entities. In 2005-2006, we realised that non-deposit taking entity could also become a source of financial instability.
Then we jacked up the regulation on them and while its difficult to go in for counter factuals but we certainly have a sense that had we not done it in 2006 what we did during the crisis time we would have faced lot more difficulties.
Q: Why do you want to have power over micro finance companies. Why don’t you give it to the state government which has adequate staff?
A: It is not the question of RBI giving up, it’s a question of legislation, whatever comes we have to live with that.
Q: You can always lobby for it and explain to the government?
A: No, whatever issues we have, we taken up with government and we will continue to do so. In their wisdom whatever legislation comes out, we try and implement the intent. As of now we regulate only the company format of NBFC which is above 12,000 in numbers. It’s not an easy task. Making regulation is easier part; supervision is what really ensures that your intent is translated. Yes, I would accept that it is a difficult task but we have to live up to that, we have to device our own methods.
Q: Even today after the experiment with base rate, we don’t see banks passing on rate cuts to old customers. The contract is very clear that we will charge you more if the cost of money becomes more and they did that all through when rates went up but when rates come down it has not been the uniform practice for banks to give it their old customers rather they still provide a new rate or an attractive rate to a new customer. RBI has not been able to stop that?
A: These are customer issues, we are aware of that. Theoretically, the base rate is linked to some anchor and the spread has certain components; one is the credit risk and the other is tenure premium and the third one is product related costs. Speaking purely from a theoretical perspective, the reason why it can vary from customer to customer, old or new is because of the credit risk perception.
The banks are doing in a different way and we have a committee headed by myself which is looking into these issues. Once the committee comes out with its recommendations, I hope this issue will be sorted out. The banks are doing for some reasons that they think is proper and that is what we are looking into in the committee.
Q: They are doing only because it’s always lucrative to attract a new customer with lower rates and once he is with you he is saddled with you, the old customer doesn’t walk out that easily, awareness is very poor, and it is in the bank’s interest to ignore the old customer but not in the regulators interest?
A: Why they are doing it are the issues we are looking into and we will certainly come to a conclusion on these issues.