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P. Devarajan

INDIA ranks 46th as of October-end 2004 among countries aligning with international banking norms and is ahead of China, which ranks 60, going by the eStandards Forum. The Forum is a private initiative assessing the implementation of standards and codes across the globe.

The January 2005 RBI Bulletin carries a `Review of the Recommendations of the Advisory Groups Constituted by the Standing Committee on International Financial Standards and Codes: Report on the Progress and Agenda Ahead.'

For a lay journalist, the chapter — Future Agenda — is interesting and timely, as it seems to back the tough (if not rigid) RBI stance on buying equity into private banks.

"Taking into account the recommendations of the Narasimham Committee, the Advisory Group and the constraints experienced by RBI in the past in the enforcement of regulation and supervision of the banks in India, appropriate amendments could be worked out," the Report says.

It prefers legal amendments on ownership of banks by individuals and entities, which are "fit and proper"; powers to dissolve a bank's board to protect the interest of depositors and in public interest; disclosure of information to shareholders; levy of stringent penalties for violation; and supervision of banks on a conglomerate basis.

The Report believes legal changes could help align "legislative provisions with the instructions and guidelines issued by RBI" and most critically adds, "For instance, there is a need for special mention on the proposal to strengthen the existing system of regulating the acquisition of shares in private sector banks by replacing the ex-post-acquisition acknowledgement process with an ex-ante-approval system. New sections envisaging that no person shall acquire more than 5 per cent shares in a banking company without the prior approval of the RBI and higher levels of due diligence at the acquisition thresholds above 5 per cent require to be inserted."

The Report is in favour of a feasible time frame to put the tough laws on the law books.

Pushing ahead like a frenzied ideologue, it states: "Several micro-level changes can be introduced within a year's time frame so that improved compliance on core principles takes place.

For instance, while fixing the definition of `substantial interest' at a higher level, it would be desirable to require banks to obtain the prior approval of the supervisor for any proposed changes in ownership or exercise of voting rights over the `threshold.'

"Connected lending is already prohibited under the Banking Regulation Act. However, this aspect could be implemented with greater stringency. Closely related groups need to be explicitly defined and the supervisor should have the discretion, prescribed in law, in interpreting the definition on a case-by-case basis. Banks may be required to monitor the total amount of loans to connected and related parties and introduce an independent credit administration process."

Also, the Report is keen on changes to the Banking Regulation Act to help RBI regulate statutory auditors of banks. The Report has been signed by Dr Rakesh Mohan (as Deputy Governor, RBI) who is now in the Finance Ministry.

Do such reports help clarify issues when the writers of the Report do not (probably cannot) keep a distance from RBI, which is increasingly giving the impression that it wants to have a say on every financial deal struck in the country?

Should not such reports be scripted by non-government bankers? The RBI is against foreign banks holding equity in Indian private banks.

This writer has been in favour of the move, but not now when even China is allowing foreign banks to buy up a limited 25 per cent stake in government banks.

Deutsche Bank and ING are battling to acquire a 25 per cent stake in Bank of Beijing, as the Chinese government does not allow for more.

One wonders whether RBI's craze for regulatory power is a cover for its rather thin record of supervision on the ground.

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