Mumbai: The Reserve Bank of India (RBI) is considering issuing a draft discussion paper on norms for banks’ setting up and operating private equity (PE) funds, its deputy governor Usha Thorat said on Tuesday.
She was speaking at a banking conference in Mumbai, jointly organized by the Federation of Indian Chambers of Commerce and Industry and Indian Banks’ Association, the apex bankers’ lobby in the country.
The proposed discussion paper on prudential issues in banks’ floating and managing private pools of capital will sensitize banks about risks inherent in such activities and limit such exposures commensurate with their risk management and available capital, she said.
According to Thorat, regulations for banks entering the PE business would be in addition to several other steps that RBI is planning to strengthen financial regulation in the country.
Several Indian banks, including the country’s largest lender State Bank of India, have floated PE divisions. SBI (PE) has announced plans to float a PE firm along with Macquarie group of Australian and International Finance Corp. or IFC, Washington, to float an infrastructure fund. The bank has also acquired a 20% stake in PE firm Sage Capital Fund Management.
Currently, there are no guidelines to regulate the operation of PE funds.
RBI will also put on its website, by October, a draft circular detailing modalities for adopting global best practices on liquidity risk management as recommended by the Basel committee in September 2008. The Basel committee is an international body that formulates accounting norms, especially for banks.
The Indian central bank will also clarify recommendations, on other international best practices for adoption by banks, Thorat said.
In July this year, the Basel committee issued standards for higher capital requirement for trading books and prescribed a higher capital requirement for securitization and off-balance sheet items such as derivative products. RBI will soon issue guidelines to standardize these recommendations in India, the deputy governor said.
RBI will also lay down additional guidelines on securitization of loans originated and purchased by banks. The guidelines will focus on a minimum lock-in period and minimum retention criteria, she added.
Thorat said that the central bank would recommend the sound procedures and principles being developed by the Financial Stability Board for financial institutions regarding compensation packages. RBI had hinted at such a move in its annual policy in April.