Regulating banks to pre-empt any systemic crisis that can entail enormous costs for the economy as a whole comes by preventing the spread of contagion through the banking system, the deputy governor of the Reserve Bank of India, V Leeladhar, said on Monday.
Addressing the Bankers? Conference 2007 on ?Indian Banking: Towards Global Practices?, Leeladhar said ensuring safety and soundness of the banking system, therefore, becomes a predominant objective of the financial regulators. The functions of the RBI evolved over the years from micro regulation to macro prudential supervision, he said.
Some of the prudential regulatory framework include the freeing of interest rates from an administered regime, asset classifications to the risk-sensitive capital adequacy norms – initially under Basel I framework and now under the Basel II regime.
Leeladhar said there were misunderstandings regarding certain dimensions of RBI?s prudential regulatory framework like the branch authorisation policy. As against the earlier system, where banks approached the RBI piece meal, for branch authorisation, the revised system provides a streamlined approach by granting a bank-wise, annual aggregated authorisation, in consultation with each applicant.
The RBI?s objective is to ensure that the banks take an integrated view of their branch- network needs, including branch relocations, mergers, conversions and closures as well as setting up of the ATMs, over a one-year time horizon, in tune with their own business strategy, and then approach for consolidated annual authorisations, Leeladhar said.
But this move has been led to misunderstanding in some quarters that, banks have to wait for the annual authorisation exercise even if it was urgent. Leeladhar further clarified that since the branch expansion planning of banks is expected to be well thought out there should be no need for any emergent or urgent authorisation in the interim.
?However, I would like to emphasise that the new policy does not preclude the possibility of any urgent proposals for opening bank branches being considered by the RBI even outside the annual plan, specially in the rural or under-banked areas, anytime during the year.?
The number of authorisations issued by the RBI under the new policy has been much higher than before. As against a total of 881, 1125 and 1259 authorisations given by the RBI under the old policy regime during 2003-04, 2004-05 and 2005-06, respectively. The number of authorisations issued under the new policy during 2006-07 was 2028. As much as 30% and 38% the authorisations granted over two-years were not being utilised. On the operations of foreign banks in India, Leeladhar said, ?there were currently 29 foreign banks operating in India with a network of 273 branches and 871 off-site ATMs.? The facts indicate that regulatory regime followed by the RBI in respect of foreign banks is non-discriminatory, and is, in fact, very liberal by global standards.
There are no restrictions on establishment of non-banking financial subsidiaries in India by the foreign banks or of their group companies. Deposit insurance cover is uniformly available to all foreign banks at a non-discriminatory rate of premium.