To know about the RBI’s next crackdown, pay attention to officials’ speeches

Mumbai: The Reserve Bank of India (RBI) used public speeches by its top brass to hint at upcoming regulatory measures against specific institutions or even certain lending practices, a Mint analysis.

This became evident when the regulator banned four non-bank financiers, including two microfinance institutions, from new lending. According to the RBI’s October 17 statement, this was due to “significant supervisory concerns” over loan pricing.

This came just a week after Governor Shaktikanta Das said the RBI had found that some non-banking financial companies (NBFCs) were “aggressively pursuing growth without putting in place sustainable business practices and risk management frameworks “.

He also said concerns arise when the interest rates they charge become “usurious and combine with unreasonably high processing fees and frivolous penalties.”

Read also: RBI warns micro-lenders, NBFCs against high, ‘usurious’ interest rates

This is not an isolated case. Less than two weeks before the regulator banned Edelweiss ARC from buying new assets in May, two deputy governors gave speeches on how the RBI had observed certain practices at asset reconstruction firms.

Deputy Governor Swaminathan J. pointed out that the RBI had found cases where “assets were sold to group entities without respecting the arm’s length principle and without subjecting them to scrutiny in inter-party transactions.” related”.

To be sure, none of the speeches by RBI officials directly refers to businesses and is instead a warning to the industry as a whole. RBI is not the only regulator giving guidance on issues it is not comfortable with. India’s markets regulator, the Securities and Exchange Board of India (Sebi), has also been vocal on issues involving financial influencers, or finfluencers, and futures and options trading. On October 23, Sebi asked regulated entities to terminate contracts with unregistered financial advisors, such as financial influencers, within three months.

According to a former RBI executive, most of the governor’s and deputy governors’ statements have been used over the years to look for monetary policy signals. “This now extends to regulatory actions,” the former executive said, adding that it is a sound practice because it is not an off-the-cuff response.

“They prepare the market and this practice provides initial signals and offers more transparency. When senior executives talk about a problem, you can be reasonably sure that something has been brought to the attention of the regulator,” said the former executive cited above.

He said the process of warning RBI-regulated institutions does not start with public speeches but rather through bilateral discussions with erroneous entities.

Read also: No carrot, only stick: why the RBI went beyond moral suasion and fines

Signal Regulatory Intent

According to experts, the RBI has issued signals well in advance and is only tackling those that fail to follow through. That said, as seen in the case of unsecured lending, industry players did not pay much attention to the RBI’s repeated warnings, which led to the regulatory crackdown.

In October last year, the RBI warned against exuberance in unsecured lending and then in November it increased risk weights on unsecured retail lending and bank credit to non-bank financiers. The move appears to have paid off, as unsecured loan growth has slowed year-over-year in recent months.

“I’m seeing this signal more and more,” said Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services LLP. The RBI wants lenders to be prepared if default rates rise in the future and for speeches to signal the regulator’s position, he added.

“Concerns also stem from expectations that the economy will not grow as fast in the coming years, increasing the likelihood of default for a portion of borrowers,” he said, adding that if lenders do not correct their course, they will be left with a loan book littered with bad debts.

When senior management speaks out about a problem, one can be reasonably sure that something has been brought to the attention of the regulator.

The strategy of first making public speeches to raise awareness among the industry and the public before an imminent crackdown has also been observed in the case of P2P lenders. In February, Deputy Governor Rajeshwar Rao said NBFC-P2Ps are “underestimating risks through various means such as promising high/assured returns, structuring transactions, providing fund recall facilities to any time, etc. » Six months later, the regulator tightened standards for P2P lenders.

Mint reported on October 16 that Faircent, Monexo, Rang De, Finzy, Lendbox (Transactree Technologies Pvt. Ltd) and Financepeer are the six new peer-to-peer (P2P) lending platforms that have received show cause notices from the RBI.

Vivek Iyer, partner at Grant Thornton Bharat, said greater transparency in RBI communications was introduced by the previous governor and the practice continues today, with the governor and his deputies using speeches to express what the RBI thinks on a particular issue.

“RBI also realized that markets would react even if the speeches hinted at regulatory discomfort and not concrete action,” Iyer said. He added that in the case of NBFCs, where the number of regulated entities far exceeds the supervisory bandwidth, leveraging speeches aimed at communicating broader supervisory expectations to the NBFC community is a strategy that the regulator seems to use it effectively.

Meanwhile, some experts said that apart from speeches, the RBI also engaged with industry stakeholders through discussion papers and projects, before issuing official circulars.

“These communications provide valuable insights into the evolving vision of the regulator,” said Uttkarsh Bhatnagar, partner at Cyril Amarchand Mangaldas. “For example, the RBI’s recent focus on KYC and cybersecurity has led to significant changes to KYC regulations and the promulgation of comprehensive regulations. cybersecurity and resilience framework, respectively.