Harmonising banking definitions is a key step to simplifying the regulatory system

The RRA suggested the creation of a single updated master file (glossary) containing definitions of data items and uploading it on the RBI website.

The Reserve Bank of India (RBI) recently announced that it had harmonised definitions related to the banking system and that it put all the definitions in a one-stop glossary which would be updated regularly with both changes in existing definitions and new definitions.

The harmonisation is an outcome of an exercise undertaken by the Regulatory Review Authority (RRA) to review and streamline RBI’s regulations and compliance procedures. The RRA, established by the RBI in April 2021, after wide-ranging consultations with all stakeholders, suggested the creation of a single updated master file (glossary) containing definitions of data items and uploading it on the RBI website. In its report to the RBI, it noted: “The feedback suggests that information relating to filing of the returns - such as guidance manual/notes, definitions of elements, links to portals, etc., tends to be prescribed across different circulars and regulations at various places on the website.”

Need For Harmonisation

Harmonisation is important to end chaos and confusion. If there are multiple definitions, compliers which are banks and regulated entities, in this case, will face difficulties in complying with the regulations. One will not know which definitions to follow. Consider, for instance, the definition of banking itself. While banking existed for centuries, there was no definition of banking till the RBI was established in 1935. As a banking regulator, how does it regulate when there is no definition of banks? The Indian Companies Act of 1913 was amended in 1936 to include the definition and business of banking. The legislation also prohibited banks from engaging in other businesses, which was the standard practice at that time.

After the failure of the Travancore National and Quilon Bank in mid-1938, the RBI realised the need for comprehensive banking regulation. World War II and the Independence movement delayed the legislation. Finally, Banking Regulation Act was enacted in 1949 and since then all legislations that touch banking, such as RBI Act and the Companies Act, rely on the definition laid out by the Banking Act. If there was no harmonisation, then different acts would have defined banking differently, making RBI’s regulations and supervision completely ineffective. Banking has developed significantly over time, requiring intervention from the regulator. The regulator in turn desires clear and harmonised definitions.

While this round of harmonisation has not all removed ambiguities in regulations, it was certainly reduced them. Even before the current RRA came into being, the RBI had harmonised 189 definitions in the course of similar exercises in 2017 and 2018. This year, it has added 101 new harmonised definitions to the list taking the total count to 290 such definitions. It is only when one goes through the definitions, does one realise that there are so many types of deposits, borrowings, loans and so on. The glossary can easily be included in the syllabus of a course on Indian banking.

In the earlier rounds of implementing RRA recommendations, the RBI withdrew 714 circulars across departments and discontinued/merged/
converted online the filing of 65 regulatory returns. Just like the one-stop glossary, it has made a one-stop “Regulatory Reporting” link, where consolidated information relating to regulatory reporting and submission of returns by regulated entities (REs) are made available in a single place. These measures have made the Indian regulatory system lighter and less burdensome.

To be sure, ambiguities can not be completely removed as there can never be a perfect system. As banking evolves, new regulations will be required, which in turn will lead to new types of complexity and ambiguities.

Defining New Developments

For instance, the harmonised definitions glossary does not have definitions of digital and green finance. The RBI recently released guidelines on green deposits which had definitions of green deposit, green finance and so on. Last year, it had released regulations on digital lending. Given the rise in both digital and green finance, definitions pertaining to both have to be included in the glossary. It will also not just end with green and digital finance as the space is evolving and changing all the time.

Therefore, at best, the RBI can continue to make the effort to reduce and streamline the regulations. The RRA 2.0 in its report notes that despite this mammoth task, “there is still a need to further identify redundant/ obsolete regulatory instructions”. It suggested that all the RBI departments take ownership and work individually to weed out obsolete regulatory instructions. The identification and weeding out process should be a continuous affair going forward.

Overall, the exercise of simplifying and easing banking regulations is highly welcome. It is only when all the compliances and definitions are considered do we understand the complexity of the banking system and its equally complex set of regulations and compliances. Despite the cleaning up, banks and other regulated entities have 290 definitions and 244 returns for various kinds of transactions & activities.

Amol Agrawal teaches at Ahmedabad University. Views are personal, and do not represent the stand of this publication.