Is #RBI’s crackdown on financial sector violators indicating a tougher regulatory environment?
Join in with Vishwanath Nair on 'The Big Story'.
Join in with Vishwanath Nair on 'The Big Story'.
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00:00 Hello and welcome to NETV Profit.
00:01 You are joining us on The Big Story where we are talking about the Reserve Bank of India's
00:06 recent actions against non-bank financial companies as well as some other market participants
00:11 who have broken RBI rules.
00:13 Now just on the 5th of March, the Reserve Bank of India issued a press release on its
00:18 website citing GM Financial Products and a review that it conducted of GM Financial Products
00:24 after a complaint from SEBI.
00:26 The Reserve Bank of India found certain lapses at GM Financial Products and the way that
00:29 they were doing their IPO financing business, their debenture financing business and because
00:34 of that the RBI barred GM Financial from extending loans against any shares or debentures, any
00:40 other such securities.
00:43 A day before that on the 4th of March, that was when the Reserve Bank of India issued
00:47 another press release that was about IIFL finance where they talked about how gold loan
00:52 financing business had certain governance lapses, certain operational lapses and that's
00:57 why the RBI barred IIFL finance from going out and lending against gold.
01:03 A few weeks before that on the 31st of January, the Reserve Bank of India issued guidelines
01:08 against Paytm Payments Bank where it said that despite the RBI repeatedly going to Paytm
01:13 Payments Bank and asking them to fix issues with regard to KYC, the bank had not done
01:19 enough to address these concerns and that is why the RBI would order a complete stop
01:26 on any banking services provided by Paytm Payments Bank.
01:29 A few weeks before that, if you go to December, there were rules against banks investing in
01:35 EIFs, there were certain guidelines issued to peer-to-peer lenders and sometime before
01:40 that in November, the Reserve Bank of India raised risk weights on unsecured credit.
01:45 Now this is a series of actions that have happened within the banking and finance sector
01:51 with the RBI attacking certain specific areas where concerns were developing and then certain
01:58 entities where the RBI had problems.
02:01 There has been a change in the approach because earlier the Reserve Bank of India would have
02:04 probably issued, probably levied a penalty, but now it seems that the RBI is more intent
02:09 on putting business restrictions on these entities.
02:12 To discuss this further and to answer these questions in a slightly more deep manner,
02:17 I have with me Mr. Abhisit Devanji from EY.
02:20 Mr. Devanji has been a long-term commentator and an expert with regard to the banking and
02:25 financial sector in India.
02:26 Mr. Devanji, welcome to this conversation, sir.
02:29 Thank you.
02:30 Let me start with my question.
02:33 Is the RBI's approach changing from doing small penalties to now just completely shutting
02:39 off businesses?
02:40 Well, I think from what you all explained right now, there seems to be some level of
02:47 concern with respect to systemic risk.
02:50 And I won't say that's completely misplaced.
02:53 The level of action taken against it, going from actually stoppages of business, not that
02:57 RBI has not stopped businesses before.
03:00 And as long as these stoppages come with adequate warnings to improve systems, I don't think
03:05 it's completely misplaced.
03:06 But what seems to be the case now is I think this whole issue around systemic risk, especially
03:12 in potentially open exposures, especially again on the consumer and SME side, the lab
03:21 side, which is kind of bordering on personal expenditure.
03:26 This seems to be a little bit of a concern in RBI's mind, and they seem to have now been
03:30 cracking down primarily on asset classes, which are kind of difficult to value on the
03:39 peripheries.
03:40 You take shares, you take gold.
03:41 There is a potential that there could be this unsecured clean portion on it, which RBI seems
03:47 to be really worried about because they can't really gather the momentum, what the impact
03:52 would be.
03:53 And of course, the other thing is it's only primarily focused towards NBFC.
03:57 It hasn't touched banks on it because the banks have added liquidity to be able to manage
04:02 the situations.
04:03 NBFCs may or may not have the liquidity because when the paranoid spreads, what will happen
04:11 is that NBFCs will have liquidity issues, which they may find difficult to do.
04:15 And that problem is precedented.
04:16 So in a sense, there is a little bit of a concern that RBI has.
04:22 Whether this is an overreaction or not, time will tell.
04:26 But what seems to happen is that when you stop businesses, markets react very differently.
04:32 And when market reacts differently, a sense of confidence in that entity goes away.
04:37 And when a sense of confidence in those entities go away, you find a run on those entities.
04:42 So I think the impact sometimes on business closures are large.
04:46 And I would again reiterate that it would be important to publicly disclose some of
04:51 the reasons so that those reasons can be understood better by the consumers and the stakeholders.
04:58 And to some extent, when the regulator puts those conditions down before issuing an order,
05:04 there could be a sense of what else could be done apart from simply banning businesses.
05:08 So yes, it could be a bit of a drastic step, but one can't rule out the fact that there
05:14 is a worry that there could be a systemic issue.
05:17 Correct.
05:18 So I want to tackle some of these points individually.
05:22 Firstly, with regard to how the RBI is treating the non-bank finance sector and people who
05:27 are bending rules or breaking them are facing the music at this point in time.
05:31 Now for the NBFC sector itself, this looks like a bit of a repeat because 2018, after
05:37 the Allen FS crisis, you had this situation.
05:41 You had your DHFL failure.
05:42 You had later Reliance Capital, Shire.
05:46 All of these cases you are intimately familiar with.
05:48 But I'm just trying to understand, will this then lead to that kind of a fallout where
05:53 you eventually have certain players who just are not able to deal with the pressure?
05:57 No, so I think the rest of the cases that you just mentioned are also cases where there
06:04 were apparent frauds.
06:06 And those balance sheets were being stuck around despite those frauds happening in those
06:12 entities.
06:13 And there were liquidity mismatches in those cases.
06:14 There were frauds and there were liquidity mismatches.
06:17 And when banking finance kind of slid away from NBFCs, they were not able to meet those
06:23 liquidity mismatches.
06:24 So I think that was a problem.
06:25 The problem that we're dealing now is that of a system that is coming out of retail,
06:31 where a lot of people have grown their balance sheets significantly over time and have slid
06:36 from secured lending to retail lending in a fashion because the banking system has moved
06:42 into more security.
06:43 So from a cost of funds perspective, NBFCs have slid to a slightly, as you can say, subprime
06:50 lending.
06:51 And there is a concern emerging out of that that are we looking at systemic risk sitting
06:55 in that business?
06:56 But as I said, there could be a potential systemic risk and one has to appreciate the
07:01 regulators' concern for that.
07:03 At the same time, one has to make sure that stopping of businesses could have a ripple
07:08 effect.
07:09 And that ripple effect could want to stop.
07:12 And very frankly, Howard Marks has said that economists are people who do not have market
07:16 responsibility.
07:17 I guess that could be said for regulators too.
07:20 So, okay, fair enough.
07:22 I think the last time around, the criticism that the RBI sort of took on was the fact
07:28 that it was maybe a little too late in acting with regard to the problems that were emerging.
07:34 So now they are acting even before the problem becomes or the problem is recognised as a
07:40 real problem.
07:41 I mean, yes, it is an issue, but is it a problem?
07:44 I wanted to get your thoughts on this.
07:47 Is this preemptive?
07:48 As you said, ripple effects do follow once you take actions like this.
07:52 But is this approach a good approach for a regulator to have?
07:55 Or do you think maybe the system should have some room to make mistakes?
07:58 Obviously, it depends.
07:59 We do not really know the facts.
08:01 To what extent has the Reserve Bank kind of given them enough warnings and given them
08:09 enough ability to change?
08:11 And then is this drastic step taken as a result of a non-compliance of an aggressive nature?
08:17 If that be the case, then I think those actions would be justified.
08:20 And frankly, I'm not privy to what the real problems of these companies are.
08:27 But yeah, fundamentally, I think that stoppages of businesses would have been, I mean, RBI
08:33 would have taken the decision only when after they applied every other method.
08:36 And of course, then there is the more expensive method of the administration process.
08:42 And I think that would be a far more drastic measure to take.
08:44 And RBI always has been trying to avoid those drastic measures because those destabilize
08:49 organizations and sometimes lose value.
08:53 So now what you're saying is, okay, you may have a temporary blip in your business stability.
08:58 But as long as RBI believes that situations can come around.
09:01 Now, situations like Paytm Bank, for example, RBI said, sorry, we're not giving you a chance
09:05 to turn around at all.
09:06 And we want you to shut down on a particular date because we're giving enough warnings
09:11 to you.
09:12 So that could be a different level of dissatisfaction with the process.
09:15 And that's why they could have taken those actions.
09:20 So I think here, while it is drastic and it has issues that could have potential ripple
09:26 effect issues, I think it would not impact these organizations that drastically.
09:32 Because these organizations are fairly well capitalized and fairly well liquid.
09:36 In the short run, there would be an impact because markets would panic.
09:41 But I think their ability to come back would also be quite high.
09:44 So I think RBI has not kind of spelt doomsday for the recent two ones, and for Paytm it
09:51 has.
09:52 And as far as the AIF issue that you raised was concerned, I think that was clearly a
09:56 systemic issue.
09:57 In a sense, that some of the NBFCs were actually pushing on credit to AIFs and taking junior
10:03 structures, which are actually NPLs in the market and there was nothing.
10:06 However, that had another effect, which maybe was not taken care of, is that people make
10:14 banks and financial institutions make genuine investments in AIF.
10:17 And those were not carved out.
10:19 So ideally, I think these kind of fraud monitoring or systemic risk type issues are causes for
10:25 losses, and I think rather than regulation, a better way to tackle it would be through
10:29 specific inspection.
10:30 And that's what they have done in the case of JM and IAF.
10:33 They have not changed regulation.
10:35 They have simply said, fix yourself and then continue doing the business.
10:40 That didn't happen with the AIFs because this came out of the regulation.
10:43 And as far as Paytm is concerned, they were as drastic as saying that, please shut the
10:46 operations after a particular deadline.
10:49 So the RBI has also calibrated depending on what they believe the problem is.
10:52 But yes, we've seen too many too quickly.
10:57 I think that's where this conversation is emanating from, is the back to back nature
11:01 of it.
11:03 That was a little worry.
11:04 Okay, I want to take the last question with you.
11:06 You mentioned the point about the RBI should be a little more transparent with explaining
11:12 the reasons as to why they are announcing these restrictions on the businesses of these
11:16 companies.
11:17 Historically, what has been maintained is that if we put out everything in the public
11:24 domain, it may cause confusion, it may cause runs, and that's probably not what the RBI
11:29 wants from a financial sector stability point of view.
11:32 But do we have a market that's far more mature, far more informed to be able to look at the
11:38 regulators' findings and then say, okay, this is clearly a problem and that's why this happened?
11:44 So I think corporates can manage their comp better if RBI came out with reasons.
11:50 Because they could take those reasons and give specific answers, rather than have complete
11:56 bans.
11:57 SEBI does that very effectively.
11:59 And I think international regulators also do that.
12:03 So I think it may be a good practice to do, maybe what to disclose would be left to the
12:07 regulators' discretion, which I'm sure they will use well.
12:10 But what happens more, Vishal, is that sometimes when you're penning down the reasons why you
12:15 want to take specific action, when you pen down those reasons, you may rethink the actions
12:19 that you're proposing to take.
12:20 And that would help everybody.
12:21 Point of reflection.
12:22 Yeah.
12:23 All right, Mr. Banjee, thank you so much for talking to us.
12:26 As always, it's a pleasure talking to you.
12:28 And for our viewers, please do continue watching NDTV Profit.
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