Central bank of India likely to propose stricter rules for shadow banks: sources

NEW DELHI / MUMBAI (Reuters) – India’s central bank appears to be proposing tightening rules on “shadow banks” in a bid to strengthen the solvency and stability of a sector that has been showing signs of pressure over the years finally, two sources said.

The Reserve Bank of India has been trying to tighten regulatory norms on the sector since Infrastructure Development & Financial Services, the largest non-bank financial company, went bankrupt in 2018, and Dewan and Altico Capital Housing Finance Corp. failed on payments in 2019.

The RBI is expected to issue recommendations in a discussion paper next week, suggesting that larger shadow banks maintain a legislative liquidity ratio, the sources said.

Officials asked not to be named as the discussions on the proposals are not public.

Indian banks are required to hold deposits of at least 18% that they are required to hold in cash, gold or government securities.

The RBI could also suggest that large nonbanks need to maintain a reserve ratio. For banks this ratio is 3%, reduced from 4% in an amount sent by the central bank that was returned after 31 March.

The move could be a major cash drain for the sector which is currently free from maintaining these asylum ratios, allowing them to lend to subprime lenders as well.

The proposal is expected to recommend the gradual implementation of the asylum ratios, giving nonbanks time to comply, one official said.

“The cost of complying with rules and regulations should be seen as an investment, as any failure in this regard will be detrimental,” RBI Governor Shaktikanta Das said in a speech on Saturday, referring to more regulation over the years. finally for banks and shadow banks.

One official said there is a move to avoid the failure of large shadow banks that could pose systemic risks and is expected to encourage some of the biggest ones to move toward becoming full-time banks.

But shadow banks believe the new norms will hurt their work.

“Shadow banks enjoy certain flexibilities that allow them to fund the last mile that banks cannot do,” said a nonbank chief executive. “Blurring the lines” between banks and nonbanks would be detrimental to India, where financial inflows remain low. ”

At their last monetary policy meeting last month, Das said shadow bank rules needed to be reviewed and a discussion paper would be issued by mid-January.

There are nearly 10,000 shadow banks in India but just over two dozen are thought to be large enough to be a systemic threat, sources said.

Raising liquidity ratios “or other liquidity buffers could slow down earnings” said AM Karthik, head of ranking in the finance department at ICRA. Lenders need to manage their treasures more efficiently, which would mean additional labor costs, he said.

The RBI also recommends tougher investigations on thousands of smaller nonbanks, one official said. The central bank may not recommend conventions such as statutory lending or investment ratios, but will recommend further scrutiny of their books, the official said.