RBI MPC Analysis: It’s a pro-banks, pro-India Inc economic policy

Reserve Bank of India

Uday Kotak and CS Setty should be the happiest bankers today. Kotak, the founder promoter and non-executive board member of Kotak Mahindra Bank has for long been asking why there should be regulatory restrictions on banks to funds acquisitions. About a month ago, Chairman, State Bank of India, CS Setty, joined Kotak in the demand. On October 1, when the Reserve Bank of India Governor, Sanjay Malhotra delivered his post-MPC (monetary policy committee) speech, what stole the show was the package of 22 additional measures aimed at strengthening the resilience and competitiveness of the banking sector, promote ease of doing business and improve credit flow, apart from a host of other benefits.

A new rule book at play

Whether it is the freeing up of acquisition finance for banks to do as business line, the proposal to reduce risk weights on segments such as MSME lending and residential housing, watering down the proposed Forms of Banking and Prudential Regulations for Investment, doing away with the restrictive norms for lending to borrowers with credit limit of Rs 10,000 crore or more, or even increasing the limits for loan against securities and IPO funding, all of these are steps in the right direction and is aligned to how capital is chasing the larger markets.  This is also a reiteration that if credit should penetrate and compound to sections of the economy who have the actual wherewithal with juice it out and deploy the money back into the building blocks of the economy, the money should be channelised through the formal banking system. Not through private credit or credit substitutes. This may not have been emphasized by Malhotra in as many words when he was delivering his post-MPC speech, but directionally it points to that.

Channelizing lending through banks

The move to bring about dynamism in deposit insurance and the intent to revisit licensing norms for urban cooperative banks also drill down the fact that when credit is disseminated through direct banking channels, the consequent multiplier effect may be more powerful. Some of the proposals introduced on October 1 could go a long way in reshaping the dynamics of the banking system and consequently propel meaningful credit growth, including the return of demand for loans from India Inc.

Bankers say this is early Diwali gift for them. They equally acknowledge that they should brace for one or two more rate cuts; quantum though will depend on how the macro factors such as inflation and domestic consumption play out. It was one of the few times, when despite a status quo on rates, it more than compensated for the goodies given to the banking system in the form of progressive reforms.

Need for higher supervision

That said, for a conservative observer, who has witnessed the struggles of the banking system and the government to bail out public sector banks, there is an iota on how well banks will manage their new found freedom. What will be the new rule book, how many will play by rules and as a relatively new banking system, are we there yet to lower the guardrails, these are some top of the mind questions. More importantly, the threshold and quality of RBI supervision needs to be amped up many notches to ensure that every one falls in line. Given how the industry has seen four large bank failures, the country cannot afford another one at least for the decade ahead of us. Is the regulator ready to play by the new rules?