Icra says proposed bank licensing rules to allow corporates a positive move

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December 03, 2020 11:01 PM

It added that there is a need for a larger play by private sector in the lending space because of the limited capacity of the state to capitalise lenders.

As per Icra’s note, moratorium has benefitted the borrowers.

Amid criticism of the Reserve Bank of India (RBI) for mulling granting bank licences to corporate groups, rating agency Icra on Thursday welcomed the proposed norms saying there is a need for a larger play by private sector in the lending space.

Bank licences will be granted only after enhancing its supervisory framework to prevent lending to connected entities, ratings agency Icra said.

It added that there is a need for a larger play by private sector in the lending space because of the limited capacity of the state to capitalise lenders.

A majority of watchers, including former RBI governors and economic policymakers, have expressed concerns for allowing corporates into banking and the circumstance under which the change is proposed. But, for one member, everybody in a panel opposed the idea to allow corporates into banking.

The report suggests amendment of the statutes governing banks by the government before such exceptions are made.

“The actual award of licences is likely to happen after the RBI significantly enhances its supervisory framework to prevent lending to connected entities of the corporate group,” the rating agency’s Vice-President Anil Gupta said.

It added that the recommendations of the internal working group are positive and auger well for the banking industry, given the need to expand bank credit.

“Increasing private participation in the banking sector is a pressing need given the fact that continuing dependence only on public sector banks can escalate the fiscal bill.

“Also relying on PSBs for credit expansion could entail significant capital infusion in public banks by Government of India (GoI), which itself is constrained for resources,” Gupta said.

A higher 26 per cent promoter holding cap as against the earlier 15 per cent could be attractive for promoters of large NBFCs to convert to bank, it said adding that the possibility of further tightening regulations for larger NBFCs can also help push conversion.

Conversion of larger non-banking financial companies (NBFCs) to bank can help through reduced dependence on wholesale liabilities, better regulatory supervision, timely regulatory intervention in case of a failure and asset diversification in loner run, the agency said.

These factors could additionally support the regulatory stance for considering larger non-banks, even though many of these were not award license in previous round, it said.

It said while licensing of new institutions is positive for improving credit penetration and higher competition, precedence shows that resolving a failed bank typically meant a merger or a bail-out by a PSB, which is essentially a cost to the tax payers.

Hence, there is a need to revamp the resolution framework for failed banks/NBFCs and in this regard, the proposal to create a resolution corporation under the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, is yet to be enacted, it said.

“While RBI has not allowed depositors to be impacted in previous bank failures, this creates indiscipline among depositors” to park their savings with weaker banks giving higher interest on deposits,” it said, pitching for a re-introduction of the controversial FRDI Bill by the government.

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