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The Reserve Bank of India has cautioned against banks building complex structures and ‘shadow banking', or practices by which banks conduct their businesses in such a way – sometimes through subsidiaries – that transactions do not show up on their conventional balance-sheets.
Delivering the valedictory address at Bancon 2011 today, RBI's Deputy Governor, Mr Anand Sinha, said, “Full attention of the (international) Basel committee and the Financial Stability Board is on shadow banking system.”
He said that when the Basel Committee was working on banking issues (for bringing in new capital adequacy norms) the issues were “so technically demanding that nobody had the energy or time to look at shadow banking.” But now, that much of the capital adequacy regime has been put in place, shadow banking is under focus, he said.
(Incidentally, only the G-20 at its recent meeting at Cannes, France, had “agreed to strengthen regulation and oversight of shadow banking.”)
Similarly, the RBI has been extremely wary of complex (corporate) structures of banking entities. “Even though we have not issued any circular on that, we are extremely mindful of the downsides of complex structures and we do not encourage even step-down subsidiaries,” Mr Sinha said.
He said that simple corporate structure “de-risks banks and frees them of worries of corporate governances issues in its subsidiaries and associates.” Mr Sinha noted that the Banking Regulation Act laid down the range of activities that banks and its subsidiaries may take part in.
“But banks' involvement with companies at a level lower than subsidiaries is not prohibited in the Act,” he said, adding that “that is something we are wary of and are going to come out with a circular very soon.”
Noting that the current regulatory stance was that there should not be a bank that is “too big to fail”, Mr Sinha said that at the same time there was a need for larger banks too. “Where is the tipping point? I don't know, but I would say that we need larger banks, though non-complex banks,” he said. He said that, however, there ought to be more than one large bank, as otherwise the market would be skewed.
Infrastructure funding
Pointing out that the 12th Five-Year Plan called for infrastructure funding of $1 trillion, Mr Sinha said the “banking system is hamstrung, with increasing exposure to infrastructure and concentration risk is building up.” He said that while asset-liability management issues had not yet hampered the banking system, “going ahead, it certainly will.” He called for promoting take-out financing.
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