Usha Thorat has enjoyed every minute of her nearly 40 years as a central banker. She has worked in nearly all the departments of RBI, dealt with banking affairs, India?s foreign exchange and international investments and monetary policy. Next month, she retires after a five-year stint as a deputy governor of RBI. ?There has never been a dull moment, and it has been fulfilling stint? at the RBI, she said. Thorat joined RBI in Apr 1972 after a master?s in economics from the Delhi School of Economics. In an interview, Usha Thorat talks about role of independent directors and conflict of interest that might arise from the entry of industrial houses into the banking sector.
More clarity must for new banks
It could be a while before the RBI licences more banks in the private sector as it has several regulatory issues to sort out. Discussions on the norms that will guide the selection of licensees have begun, said Thorat, who deals with banking operations and supervision. A key concern could be the financial health of the promoter, she said.
The RBI is cogitating over a host of regulatory issues, she said, and is meeting officials of industry bodies, bankers, non-bank finance companies to clarify its concerns.
Apart from these, ?equally important are issues like contagion in stressed situations,? she said, hinting that financials and balance sheets of group companies would be a key factor in allowing a business house to open a bank.
Recently, Thorat and her colleagues held discussions with officials of several companies that are reportedly eyeing a licence. These companies include Aditya Birla Financial, M&M Financial, Magma Fincorp, IndiaBulls Financial, L&T Finance. RBI officials also discussed the licensing issue with Confederation of Indian Industry and Associated Chambers of Commerce and Industry of India.
?We have not made any conclusions (as yet) and there are a lot of issues for consideration,? Thorat said, indicating more discussions are likely before the guidelines are issued. ?What we are keen is that the business model should be credible and sub-serve the objectives for which the licensing of new banks is being considered,? she said.
In August, the RBI released a discussion paper ?Entry of New Banks in the Private Sector?. It proposed deleting an existing rule that stopped large business houses from promoting new banks. As an interim measure, the RBI said it could allow industrial and business houses to take over regional rural banks before considering them as candidates to set up new banks. Business houses or NBFCs involved directly or indirectly in real estate activity will not be permitted to set up new banks. A key driving principle for RBI while licensing new banks will be financial inclusion or inclusive growth.
Foreign banks operate in different field
Foreign banks in India cannot expect to be governed by the same set of rules that apply to local banks, a top central bank official said. A so-called level playing field demanded by foreign-owned banks operating in India ?is debatable because foreign banks are part of the global arena, so their jurisdiction is different,? said Thorat. ?They can do several things (in their overseas jurisdiction) that our banks cannot do,? she noted.
Foreign banks? operations came into public focus after RBI governor D Subbarao proposed a discussion paper on the mode of presence of these banks. The paper on foreign banks? presence will be released soon, she said. Referring to the Subbarao?s remarks, Thorat said ?the issue of subsidiarisation (through branch or wholly-owned subsidiary) was raised by the governor in the annual policy in the context of the global crisis, the issues of cross-border resolution and the need for greater regulatory comfort and control to the host regulator.?
Teaser rates pose risk for banks
Teaser-loan schemes of banks that lure borrowers by offering loans at lower interest rates initially remains a big worry for the RBI. The teaser-rate on loans on housing and auto loans can be misleading to the borrower, said Thorat, who supervises banking operations department. ?The problem with teaser rates is that they can lure borrowers into thinking that these rates will last and that their earnings and wealth will remain intact,? she said.
?I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account repaying capacity of the borrowers when the rates become normal,? Thorat said in January. Her remarks followed 8.0-8.5% rate offered by a host of banks in the initial year on home loans.
In the past few months, many banks took the RBI?s caution and discontinued the scheme. However, the biggest commercial bank State Bank of India continued with the teaser rate scheme.
BANKS CONSOLIDATION
In the private sector, we have seen consolidation and mergers happening. We need to have a competitive environment; we also need to think about too-big-to-fail issues. This is a part of the global debate. At the same time, there are lot of synergies involved in consolidation especially to achieve global size. While consolidation is an issue for the owners (the government) to decide, the RBI?s lookout is to ensure that any merger is in the interest of depositors and financial stability, and it meets our prudential and policy objectives.
GLOBAL ACCOUNTING NORMS: LONG WAY OFF
Banks in India are still on standardised approaches under Basel II. Hence, there is a lot to be done to capture risk and maintain adequate capital according to risk. The various improvements to Basel II recently introduced will also need to be captured in the regulatory framework.
Banks, especially, globally active banks need to improve the risk management systems and move on to advanced approaches. Most banks in India already comply with most elements of the Basel III package. Hence, the focus in India is to ensure that banks meet the challenges of high growth in the real sector while not compromising on prudential standards and norms. On adoption of IFRS, the Malegam group has laid down a road map. However, there is no consensus yet on the adoption of many of the standards on financial instruments. For example, the Basel committee has stressed the importance of not increasing the fair value component. In our case, this is very important as financial markets are not very deep or liquid and fair valuation could be an issue. Prudential filters can be applied even after adoption of IFRS. The importance of IFRS to banks is not only in the implementation within the bank, but also in understanding its implementation by companies, whose accounts they will scrutinise as part of their credit appraisal exercise.
RISKS OF DERIVATIVE TRADING
The department of supervision has issued show-cause notices to certain banks with regard to their derivative transactions. Appropriate action will be taken after hearing the banks? responses. The lesson to be learnt is the need for both banks and customers to understand such products and the associated risks, especially in those with leveraged and complex structures.
