How has the RBI evolved over the years?
According to the former Executive Director of the RBI Lily Vadera, “Regulations have to be in sync with the requirements of the Indian economy and global developments & banking regulations have to keep evolving with the needs of the time. Earlier, there was nationalization of banks so that one could cater to agrarian needs and small businesses. Gradually, as the economy developed, there was a need for more competition to provide better services and to leverage technology, leading to private-sector banks and regulations to enable foreign banks. And with the financial inclusion agenda, the concept of the differentiated bank came up, where payments banks and small finance banks came in. So, regulation isn’t static and keeps changing with the need of the hour. Earlier, we had regulations that were entity-specific, with even a lighter-touch regulation for NBFCs, because they were providing last-mile connectivity, so there was a need to give them more flexibility. And with co-operative banks, there was dual control. With changes in the BR Act, the RBI was given more power. Furthermore, we saw NBFCs growing with this whole concept of interconnectedness between banks and NBFCs and the co-operative sector”.
“Today, there may be a holistic approach to regulation that not only looks at entity-based regulation but also activity-based regulation. There are guidelines, like securitization, where there is a common set of regulations applicable to all lenders, so there’s a match of entity- and activity-based regulations. And while the NBFC sector had a light-touch regulation, there were some NBFCs which grew quite large in terms of asset size and were almost as big as some of the private-sector banks. So, the concern for the regulator was that anyone who grows too big may pose a systemic risk and hurt the financial stability of the banking sector. So, scale-based regulation came out for that sector with more stringent regulations for entities of a larger size. And after the COVID-19 pandemic, digital banking services got accelerated and so, there needed to be a set of guidelines for this, because there was a regulatory arbitrage between entities that were regulated and entities which weren’t. So, to create a level-playing field, the whole concept of digital lending guidelines came out focusing on consumer protection. With the interplay of FinTechs leveraging technology to provide better solutions, the regulator started thinking about a regulatory sandbox to explore new innovations in a tested environment in case it’s too disruptive”, states Vadera.
And how could the RBI evolve in the next 5 years?
Vadera remarks, “I think the digitization of the banking sector leveraging technology is going to be the way forward for more efficient banking services being provided in a more cost-effective manner. The payment space has rapidly grown & remittances and payments in a digital form have really ballooned over the years. Another aspect is cross-border payments being made quicker and cheaper with the use of technology and collaboration with FinTechs. On the credit side, there’s a credit gap and the use of technology to provide cheaper and faster credit would be another focus area. And as we get into more digital banking services, there would be risks in terms of cybersecurity, which would have to be addressed… The functions of banks are becoming more complex, so I think there’s going to be a lot of outsourcing to make services cost-effective and while there are outsourcing guidelines by the RBI, a lot more focus would go into monitoring and ensuring data privacy, so that there’s no misuse or leakage of data… A lot more regulations around customer protection are what I see going forward… Climate change is another area where I think some guidelines or requirements for banks to see how they’ll manage the transition risk from a fuel to a non-fuel or green-fuel base. But, at the same time, we’re a developing economy, so we cannot ignore fossil fuels”.
And are banks in India still plagued by an NPA crisis?
Vadera declares, “There was a phase when the banks were saddled with high NPAs. With recovery seemingly not happening, further lending was getting impacted and even on the corporate side, the balance sheet or the bottom line was affected. So, there wasn’t any appetite from the corporates to borrow more, because the economy was slowing down, with a demand for credit not being there either. The banks had burned their fingers with exposure to certain sectors which landed them with huge NPAs, so there was risk aversion. But we’ve come a long way from that NPA crisis with asset quality reviews and intensive regulations. Today, the health of the banking sector is actually quite excellent with NPAs at an all-time low and is adequately capitalized, with credit growth picking up”.
And is there a worry that FinTechs are outpacing banks?
“During the COVID-19 pandemic, FinTechs did come up with a lot of solutions to help at the time, when banks were not fully functional and the inability to physically go to the banks. But, I don’t think that there should be a worry of banks becoming redundant, because there’s a more collaborative approach between banks and FinTechs, which is a good thing. Banks have all the experience and expertise, while FinTechs have the tech know-how expertise and the ability to come out with new product designs providing services more efficiently and cost-effectively”, opines Vadera.
And what about the Digital Personal Data Protection Act 2023? How could this impact the BFSI sector?
According to Anu Tiwari, Partner – Cyril Amarchand Mangaldas, “This is the biggest disruption in the BFSI sector, because increasingly, all models of money are models of data. While the RBI or SEBI or other policymakers have been framing data rules, now with the whole architecture, one can no longer just say that they would do what they feel like doing for R&D purposes, so one has to be specific, which is a big behavioural change. And there are a lot of data principles that have to be built into the notice process. And across the BFSI and asset management landscape, there are no systems or controls to honour the obligations that come from this law. So, one would have to do a gap assessment to see whether the standard prescribed by the RBI for a bank or an NBFC is higher and in many cases, one may see that the sharing of data, even with consent, isn’t possible. So, the whole idea of consent under the new law doesn’t work and when hiring new people, a fair bit of training exercise has to be undertaken. And the new Act seems to be targeting sectors, like BFSI, social media and e-commerce”.
Watch the whole interaction here:
