The Reserve Bank of India’s deputy governor, Rajeshwar Rao, said there is always the possibility of a trade-off between regulation and innovation.
Speaking at an event in Mumbai Saturday evening, he said, “We need to remain alert to the spawning of new ideas and trends in the markets. Try to understand their scale and assess their potential to disrupt the markets and consider interventions where and if necessary.”
He also pointed out that regulators must focus on achieving a delicate equilibrium that addresses the critical concerns without imposing an undue burden on regulated entities. He said overregulation could lead to increased compliance costs, affecting efficiency and innovation among market players.
He also cautioned banks and finance companies that their ‘increased reliance’ on FinTech partners to identify and onboard customers should not mean lowering of underwriting standards and improper pricing of risks.
The comments from the DG comes around the time the RBI has placed restrictions on IIFL Finance to provide gold loans, JM Financial Products from undertaking any form of business in shares and bond funding, Paytm Payments Bank from accepting deposits and Federal Bank and South Indian bank from issuing co-branded credit cards.
“As a regulator and supervisor, we are examining the prevailing models and practices to see how best they could be leveraged for effective credit delivery without compromising on risk management and prudential credit underwriting standards,” he said.
The deputy governor urged regulated entities to follow the regulatory guidelines in letter and spirit as its endeavours move towards principle-based regulations. “However, an essential prerequisite for the success of such an approach is a financial landscape which values discipline and compliance in both letter and spirit. Else, the flexibility available under the principle-based mechanism might be misused for short-term gains.”
The RBI’s DG also stated that the regulator is planning to issue guidelines on expected credit loss framework for loan loss provisioning, which will be a forward-looking measure and a leading identifier of stress.
“When issued, it is expected to transform the assessment of the credit risk and ensure that the banks will have sufficient buffers through the business cycles to withstand any impact of cyclical downturns,” he said.
He also said that RBI will soon issue guidelines for securitizing stress assets, which will help develop a robust secondary market for stress loans.
He pointed out that post-COVID, the credit offtake towards the consumer credit segment, especially the unsecured portfolio, was observed to be quite substantial. “Also, the increased dependency of the non-bank financial companies on bank borrowings was leading to regulatory concerns.”
Although the asset quality at a broader portfolio level was not exhibiting any major signs of stress, the consistently high growth reported in these segments warranted some kind of regulatory intervention, he added.
