Regulatory bludgeon

The war of words over bulging NPAs (non-performing assets) post 2010 and the regulatory subterfuge notwithstanding, bailouts to clean up banks’ balance sheets have continued to protect weak PSBs (public sector banks).

A recent Wharton School report, giving an account of the US Economic Growth, Regulatory Relief and Consumer Protection Act, 2018, says the Act has brought big relief for large banks and community banks by raising the threshold for banks required to undergo stress tests from $50 billion to $250 billion, thereby reducing the number of big banks that are considered too big to fail. It could also expand access to finance for small- and medium-sized enterprises by freeing controls on small and local community banks with assets of under $10 billion. The reverse seems to be happening in India.

Regulatory capital requirements with nominal customisation of Basel III to Indian banking, accommodating market and operational risks, continue to be a challenge. Providing for market risks where only a few hundred firms trade regularly in India is another challenge.

Research has widely acknowledged the role of irresponsible corporate lending, poor credit risk oversight and frequent interference of government in banks’ credit decisions.

Nervousness of bank chiefs, in the wake of a few being hounded for their business decisions pre-retirement, has lead to enhanced credit risks.

Business cycle or policy-led failures have ceased to concern them. They focus on secured, non-banking business like insurance, mutual funds, pension funds, government business, arm-chair retail and real estate lending, and priority sector lending.

In 2017-18, SBI, the biggest PSB, reported a 65.83 per cent year-on-year (y-o-y) growth in cross-selling income but a 5.18 per cent decline in net interest income.

The recent Financial Stability Report of the RBI, while expressing its discomfort over the results of stress tests, only sought a capital buffer to buttress them.

With farm-loan waivers facing much criticism, banks are lending less to small farmers. An RTI reply from the RBI, reported by The Wire , says that PSBs lent ₹58,561 crore to just 615 accounts in 2016. Banks are now focussing on large ticket agri-business loans. Reclassification of priority sectors by the RBI since 2012 only legitimised banks extending such credit. It can’t be that agriculture has failed and agri-businesses flourish.

The dedicated bank for small industries, SIDBI, has invested with IL&FS ₹1,500 crore and showcases MUDRA loans, but manufacturing MSEs continue to bemoan the lack of timely and adequate credit despite having the lowest level of NPAs in this segment. The CGTMSE scheme as a risk-mitigation tool is yet to prove itself.

Small finance banks, small payments banks, RRBs, NBFCs and UCBs that serve small borrowers are all on a similar regulatory platform on capital requirements.

Legatum Institute and the Taxpayers’ Alliance have cautioned that intensive financial regulation is “harmful, costly and potentially dangerous for the growth of the world economy.” Knee-jerk regulations leading to regulatory seize is as harmful as slothful regulation for a growing economy like India.

The RBI needs to be less blunt and more innovative in regulation. A calibrated response to Basel-III would help meet Indian economy’s emerging needs better.

The writer is is an economist and risk-management specialist.

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