Vault Matters | Should the regulator have the final word or the only word?

HDFC Bank which faced a ban on sourcing of new cards took a year to get back to its feet.

What made headlines in the world of finance this week was of the big banks and corporations in the US filing a suit against the Federal Reserve claiming that the annual stress test on Wall Street companies was in violation of the law.

Bankers in India on reading this had a smile on their face, one mixed with a wishful thought of whether something like this is even remotely possible in India. The context domestically pertains to the fact that nine entities, a mix of banks and non-banks, faced stringent action from the Reserve Bank of India in 2024 – a regulatory action never seen before in the country. Going by the language of communication from the regulator, it seems as though enough warnings were given to these entities before taking a strict stance.

The explanation from the entities is obviously different – that they were briefed about the shortcomings and actions were being taken to instate corrections. “The ban came from nowhere because we were constantly engaged with the regulator on a daily basis regarding this issue and they were aware of the corrective steps we were taking,” said a CEO of an entity reeling under the curbs, while trying to explain how his company landed in a spot where it cannot do business till the ban is lifted.

The narrative isn’t very different when you speak to companies which have come out of the ban. “It’s business lost for a few months and we will have to now only play the catch up game,” a senior executive vented, when asked if lifting the ban has helped the company reclaim its lost position.

The business of finance is such that business lost in a month is lost forever, especially with some of the NBFCs which operate in low-ticket, low duration products. HDFC Bank which faced a ban on sourcing of new cards took a year to get back to its feet and reclaim its market share and that was possible only because it is a market leader in the credit cards space. Same goes with Bajaj Finance as well. But that’s not true of some of the smaller players such as IIFL Finance, Bank of Baroda’s BOB World or Navi Finvest. Even Kotak Mahindra Bank is faced with a rapid decline in its card base after nine months of being slapped with a ban in sourcing new credit cards.

When the implication on the business can be as harsh as this, it’s only fair that the process of slapping a ban on entities become more transparent and two-way. Maybe not to the extreme of suing the regulator. But as an industry reasonably dependent on equity investments and depositors’ money, regulatory actions should be infused with more accountability to the larger community. As we enter 2025, the only wish for most banks and NBFCs is that they are not slapped with bans in the most unexpected manner. There’s a thin line of difference between being regulated and policed. With a new dispensation at the RBI, one hopes that the distinction be made.