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

Mumbai: The Reserve Bank of India (RBI) has been using public speeches by its top brass to hint at upcoming regulatory action against specific institutions or even some lending practices, showed a Mint analysis.

This was evident when the regulator barred four non-bank financiers, including two microfinance institutions, from fresh lending. According to RBI’s statement on 17 October, this was due to “material supervisory concerns" in loan pricing.

This came just a week after governor Shaktikanta Das said the RBI found some non-banking financial companies (NBFCs) “aggressively pursuing growth without building up sustainable business practices and risk management frameworks".

He also said that concerns arise when the interest rates charged by them become “usurious and get combined with unreasonably high processing fees and frivolous penalties".

Also Read: RBI cautions micro lenders, NBFCs against high, ’usurious’ interest rates

This is not an isolated case. Less than two weeks before the regulator barred Edelweiss ARC from buying new assets in May, two deputy governors made speeches about how RBI has observed certain practices in asset reconstruction companies.

Deputy governor Swaminathan J. pointed out that the RBI found cases where “assets are sold to group entities without following the arm’s length principle and without subjecting them to scrutiny under related party transactions."

To be sure, none of the speeches by RBI officials directly refer to companies and are more of a warning to the industry at large. RBI is not the only regulator giving hints on issues it is uncomfortable with. India's markets regulator, Securities and Exchange Board of India (Sebi), has also been quite vocal about issues involving financial influencers, or finfluencers, and futures and options trading. On 23 October, Sebi asked regulated entities to end contracts with unregistered financial advisers like financial influencers within three months.

According to a former RBI executive, most of what the governor and deputy governors say have been used over the years to look for monetary policy signals. “This is now being extended to regulatory actions," said the former executive, adding that this is a healthy practice since it is not an off-the-cuff response.

“They are preparing the market and this practice provides upfront signals and provides more transparency. When the senior leadership is talking about an issue, one can be reasonably sure that something has come to the regulator’s notice," said the former executive cited earlier.

He said the process of warning institutions RBI regulates does not begin with public speeches but rather with bilateral discussions with erring entities.

Also Read: No carrot, only stick: Why the RBI has gone beyond moral suasion and fines

Signalling regulatory intent

According to experts, RBI has been signalling quite beforehand, and it is cracking down on only those who do not follow. That said, as seen in the case of unsecured lending, industry participants have not been paying much heed to repeated warnings from the RBI, which led to the regulatory clampdown.

In October last year, the RBI warned against exuberance in unsecured lending, and then in November, it raised risk weights on unsecured retail loans and bank credit to non-bank financiers. The move seems to have worked, as unsecured loan growth has slowed down year-on-year in recent months.

“I am seeing more and more of this signalling," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP. RBI wants lenders to be prepared if default rates go up in future and speeches signal the regulator’s stance, he added.

“Concerns also stem from expectations that the economy will not grow at such a brisk pace in the coming years and that raises the probability of default for a section of borrowers," he said, adding that if lenders do not course correct then they will be left with a loan book littered with bad loans.

The strategy to first make public speeches sensitising the industry and the public before an imminent crackdown was also seen in the case of P2P lenders. In February, deputy governor Rajeshwar Rao said that NBFC-P2Ps have been found to “underplay the risks through various means such as promising high/ assured returns, structuring the transactions, providing anytime fund recall facilities, etc." Six months after that, the regulator tightened norms for P2P lenders.

Mint reported on 16 October 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 that greater transparency in RBI communications was introduced by the earlier governor and the practice continues today with the governor and his deputies using speeches to say what the RBI is thinking on a particular issue.

“RBI has also realised that the markets will react even if the speeches hint at regulatory discomfort and not a concrete action," said Iyer. He added that in the case of NBFCs, where the number of regulated entities far exceed the supervisory bandwidth, leveraging speeches to communicate broader supervisory expectations to the NBFC community is a strategy that the regulator seems to be using effectively.

Meanwhile, some experts said apart from speeches, the RBI has also been engaging with industry stakeholders through discussion papers and drafts, before issuing formal circulars.

“These communications provide valuable insights into the regulator's evolving vision," said Uttkarsh Bhatnagar, partner, Cyril Amarchand Mangaldas. “ For instance, the RBI's recent focus on KYC and cyber security has led to significant amendments in KYC regulations and the promulgation of a comprehensive cyber security and resilience framework, respectively."