BackFinancial regulators to sync efforts
Ahead of a new set of banks entering the Indian financial system, watchdogs agree to increase oversight
Premium(Abhijit Bhatlekar/Mint )
Mumbai: India’s financial sector regulators on Friday entered into a formal agreement to ensure coordinated action to monitor so-called financial conglomerates, which could potentially pose a threat to the stability of the financial system in the event that they fail.
The agreement precedes the expected licensing of a new set of private banks by the Reserve Bank of India (RBI), which last month put in place the norms that applicants for bank licences would have to follow.
The term financial conglomerate covers entities such as the State Bank Group and the ICICI Bank Group, which have businesses ranging across segments from banking to insurance, pension, mutual funds and other products.
The agreement was signed by RBI, stock market regulator Securities and Exchange Board of India, the Insurance Regulatory and Development Authority, and the Pension Fund Regulatory and Development Authority at a sub-committee meeting of Financial Stability and Development Council (FSDC), the apex body of financial regulators.
India’s regulators want to detect problems before they go on to assume massive proportions, such as the failures that led to the global economic crisis of half a decade ago, when taxpayers had to pick up most of the bill because the large institutions were deemed too big to fail. Also discussed at the meeting was surging bad loans at state-run banks.
The increased readiness for coordinated action among sectoral regulators indicates their preparedness to face any possible risks arising from such large groups in the financial system, experts said.
“The effort is aimed at mitigating the possible macroeconomic risks arising out of such financial conglomerates," said D.K. Joshi, chief economist at Crisil Ltd, the Indian subsidiary of global rating agency Standard and Poor’s.
At Friday’s meeting, the FSDC sub-committee also approved the national strategy for financial education, incorporating feedback from the public and a global peer review.
The meeting was chaired by RBI governor D. Subbarao. Others in attendance included R.S. Gujral, finance secretary; Arvind Mayaram, secretary, department of economic affairs; Rajiv Takru, secretary, department of financial services; and Raghuram Rajan, chief economic adviser, along with other sector regulators and central bank officials.
The move for greater coordination assumes greater significance as Asia’s third largest economy will shortly witness the entry of a third set of private banks in its ₹ 73 trillion banking system.
In a bid to ring-fence the ripple effect of a potential crisis in financial services groups, India’s apex bank has been tightening rules regarding their functioning.
For instance, RBI has insisted on a non-operating financial holding company (NOFHC) model for all private companies that want to float banks. According to the guidelines issued on 22 February, the NOFHC has to be registered as a non-banking financial company with RBI and will be governed by a separate set of directions issued by the banking regulator. But the financial entities held by the holding company will be governed by the respective sector regulators.
The apex bank wants a strong commitment to the sector from the promoters of new banks. The holding company should own a minimum 40% of the equity capital in the bank, which can be reduced to 15% in 12 years.
“From a risk-management perspective, it is important to be prepared for any possible shocks such as huge volatility in global commodity and currency markets. Especially given the fact that the overlap between financial markets and commodity markets has gone up and financial markets are increasingly getting more integrated," said Naresh Takkar, managing director and chief executive of leading rating agency Icra Ltd.
According to Takkar, India’s vulnerability to potential shocks from global markets has increased in the face of a rising current account deficit, which swelled to a record 4.2% of gross domestic product in 2011-2012.
In another key development, FSDC also discussed concerns over rising bad loans in the banking system as economic growth looks set to slow to a decade’s low in the current fiscal year.
Gross non-performing assets of 40 listed Indian banks rose to ₹ 1.79 trillion from ₹ 1.25 trillion in December, up 43.1% from the year-ago period. More worrying is that restructured loans are also on the rise. Analysts expect at least 25-30% of such loans to turn bad in the absence of a major recovery in the economy.
Total loans restructured through the so-called corporate debt restructuring (CDR) route crossed ₹ 2 trillion in December. In the October-December quarter, banks restructured ₹ 24,584 crore of loans, up from the ₹ 19,544 crore recast in the previous quarter, to reach ₹ 2.12 trillion.
Under CDR, banks typically stretch the repayment period to stressed companies, offer a moratorium and reduce lending rates. In the current fiscal year so far, banks have recast ₹ 62,085 crore under CDR, around 50% more than the whole of last year.
But the final figure of restructured loans could be double this estimate as it doesn’t include bilateral restructuring cases that banks undertake individually with companies.
Crisil has forecast that total loans restructured by Indian banks is likely to touch ₹ 3.25 trillion by March 2013, much higher than its own earlier estimate of ₹ 2 trillion by March.
At Friday’s meeting, the focus was on the rising bad loans of public sector banks. One of the members of FSDC, who didn’t want to be named, said the reasons for this rising were, among other things, pressure from the government to restructure loans, a weak monitoring system and not-so-competent credit appraisal in public sector banks. Private sector banks have by and large been able to contain the rise in bad loans, he pointed out.
The sub-committee also discussed the continuing uncertainty in the euro zone and the US, potential risks to stability of the domestic financial system on account of slowing growth, the rising current account deficit and concerns over the asset quality of banks.
FSDC was first mooted by former finance minister Pranab Mukherjee in October 2010, when he decided to set up an apex council for regulators to “engage in macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues".
The council also focuses on financial literacy and financial inclusion, besides issues related to financial development.
Remya Nair in New Delhi contributed to this story.
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