Economy

Reserve Bank of India likely to propose stricter rules for shadow banks: Sources

Read more at m.economictimes.com

NEW DELHI/MUMBAI:
India‘s
central
bank is
likely
to
propose tightening
rules on ”
shadow
banks” in a bid
to strengthen solvency and sustainability of a sector that has been showing signs of stress in recent years, two sources said.

The Reserve
Bank of
India has been trying
to tighten regulatory norms on the sector since Infrastructure Leasing & Financial Services, the largest nonbank financial company, went bankrupt in 2018, and Dewan Housing Finance Corp and Altico Capital defaulted on payments in 2019.

The RBI is expected
to set out proposals in a discussion paper next week, recommending that bigger
shadow
banks maintain a statutory liquidity ratio, the sources said.

The officials asked not
to be named as the discussions on the proposals are not public.

India‘s
banks must maintain at least 18% worth of deposits that they must hold in cash, gold or government securities.

The RBI could also suggest large nonbanks be required
to maintain a cash reserve ratio.
For
banks this ratio is 3%, reduced from 4% in a measure the
central
bank imposed that is
to be reversed after March 31.

The move could be a huge cash drain
for the sector which is currently free from maintaining these reserve ratios, allowing them
to lend
to subprime lenders as well.

The proposal is expected
to recommend a phased implementation of the reserve ratios, giving nonbanks time
to comply, one official said.

“Cost of compliance
to
rules and regulations should be perceived as an investment, as any inadequacy in this regard will prove
to be detrimental,” RBI Governor Shaktikanta Das said in a speech on Saturday, referring
to increased regulation in recent years
for
banks and
shadow
banks.

One official said that move is
to avoid failures of big
shadow
banks that could pose systemic risks and is expected
to encourage some of the larger ones
to move towards becoming full-time
banks.

But
shadow
banks believe the new norms will hurt their operations.

Shadow
banks enjoy “certain flexibilities which allow them
to do last-mile financing which
banks can’t do,” said an executive at a nonbank. “Blurring the lines” between
banks and nonbanks would “be detrimental
for
India, where financial inclusion is still low.”

At its last monetary policy meeting last month Das said regulations of
shadow
banks need review and that a discussion paper would be issued by mid-January.

There are nearly 10,000
shadow
banks in
India but just over two dozen are thought
to be large enough
to pose systemic risks, sources said.

Raising liquidity ratios “or other liquidity buffers could pose a drag on their earnings” said A.M. Karthik, head of financial sector ratings at ICRA. Lenders will also have
to manage their treasuries more effectively, which would entail additional operating costs, he said.

The RBI will also recommend
stricter checks on thousands of smaller nonbanks, one official said. The
central
bank may not
propose norms such as statutory lending or cash-reserve ratios, but it will recommend more scrutiny of their books, the official said.

Read more at m.economictimes.com

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