The RBI way of firefighting

A particular housing society plans a routine fire drill meticulously, with multiple steps: the residents are alerted; the evacuation procedures are laid down; and there are designated safe assembly points. Such alarms are used to conduct a trial evacuation over lazy weekends every once in a while. The emergency exits are checked to ensure they’re not obstructed.

To prevent these drills from becoming too “routine” an affair, they also switch the evacuation scenario. At times, someone stands at a particular exit with a sign reading “Exit Blocked” to simulate a potential situation and force the residents to react.

“We manage the housing society the way the RBI (Reserve Bank of India) manages the financial sector. We don’t want to call the fire brigade to douse the fire; we don’t want the fire to break out. Prevention is better than cure.”

Yes, this seems to be the mission of the RBI. It doesn’t want to see a house on fire and call the fire brigade; instead, it wants to ensure that no fire breaks out.

The recent actions against some of the regulated entities point to this.

March 15 was the last day of the Paytm Payments Bank Ltd.

Ahead of that, in the first week of March, the RBI imposed an embargo on IIFL Finance Ltd’s gold loan business, citing multiple supervisory concerns on deviation in assaying and certifying the purity of gold while sanctioning loans, non-adherence to the standard auction process for recovering bad loans, breaches in the loan-to-value ratio, unfair charges, and higher cash collections.

The RBI has also directed JM Financial Products Ltd to cease and desist, with immediate effect, from doing any form of financing against shares and debenture, including sanction and disbursal of loans against the initial public offering (IPO) of shares and also against subscription to debentures.

Months before these actions, in November 2023, the RBI had directed Bajaj Finance Ltd to stop sanctioning and disbursing loans under its two lending products, eCOM and Insta EMI Card, with immediate effect. This action was necessitated due to the company’s non-adherence to the extant provisions of digital lending guideline, the RBI said.

At the risk of sounding dramatic, we can say that the shadows are lengthening on India’s shadow banking industry. The hard fact is that the regulator has changed the way it approached supervision in the past. Having seen two large houses gutted, it is focusing on regular drills to prevent a fire from breaking out.

In late 2018, heavyweight infrastructure lender Infrastructure Leasing & Financial Services Ltd (IL&FS) went bust after it failed to meet two repayment obligations. Sixteen days after the IL&FS default, then the fourth-largest mortgage financier among non-banking financial companies, Dewan Housing Finance Corporation Ltd (DHFL) had a date with destiny. A large mutual fund sold the DHFL commercial paper at a steep discount, creating panic in the market, leading a 60 per cent intraday fall in DHFL share price.

The company managed to continue for a few months till it missed interest payment on a debt issue and was down-graded to default category in June 2019.

The RBI’s new-found enthusiasm for punishing the naughty boys needs to be seen in the right context. This is the time to do so since the resilience of the financial sector is at its peak. The level of non-performing assets on banks’ is at a historic low. Besides, their provision coverage ratio (the amount of money set aside to take care of bad assets) has been on the rise. Also, the banks are well capitalized. When did we last see such a healthy Indian banking system? Smart regulators take tough calls when the going is good.

Often, it’s a catch-22 situation for the regulator. On the one hand, if it takes hard actions against regulated entities even for the right reasons, it runs the risk of being called aggressive. On the other hand, if it’s not fast in taking action, it earns the sobriquet of being sloppy.

Why is the RBI harsh on Paytm Payments Bank? Why did it give Rana Kapoor of Yes Bank Ltd such a long rope?

Such questions are often asked because we are not aware of the work that goes into catching the naughty boys. Often, the investigation process to fix accountability is long. And, the regulator doesn’t discuss this openly since that can threaten financial sector stability. There cannot be any teaser, We get to know the story only when the RBI makes the action public.

T. BANDYOPADHYAY

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