What To Make Of RBI's Crackdown On Financial Sector Violators | NDTV Profit
Is #RBI’s crackdown on financial sector violators indicating a tougher regulatory environment?
Join in with Vishwanath Nair on 'The Big Story'. #NDTVProfitLive
Join in with Vishwanath Nair on 'The Big Story'. #NDTVProfitLive
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00:00 that will actually eventually lead to IPO and debenture financing getting affected at
00:06 JM Financial.
00:07 Remember that this is not the only action that the Reserve Bank of India has done.
00:11 If you take a look at what has happened since November of 2023 till now in March, you will
00:17 realize that the RBI has been taking specific focused action on certain entities who have
00:23 been bending the rules as far as the Reserve Bank of India is concerned.
00:26 First they started in November with how unsecured lending is handled in the Indian banking system.
00:32 So for that, the Reserve Bank of India believed that there was some amount of over exuberance
00:37 and therefore they needed to increase the risk weights for unsecured loans.
00:41 So that was the 16th of November.
00:44 Coming a few weeks later in the early parts of December, the Reserve Bank of India wrote
00:48 to certain peer-to-peer lenders stating that the questionable practices that they've been
00:54 following to extend loans to people, those need to be stopped immediately.
00:58 This did not get notified.
00:59 Of course, sources were telling this to any TV profit.
01:04 Later in the month of December on the 19th, the Reserve Bank of India came out with a
01:08 specific set of guidelines against alternative investment funds.
01:12 So what the RBI said is that banks which were lending to AIFs who are in turn lending to
01:17 any kind of a borrower of those banks, those kind of transaction needs to be stopped because
01:22 that is essentially evergreening or round tripping of funds.
01:26 A few weeks later again on the 31st of January, the Reserve Bank of India comes out with specific
01:29 guidelines against Paytm Payments Bank.
01:31 It says that Paytm Payments Bank has been under the RBI's review since March of 2022
01:38 and over the last two years, they've not actually addressed any of the issues that the RBI raised
01:42 and therefore there is a problem in how they are conducting their business.
01:46 The RBI said that it will go ahead and stop all banking services being provided by Paytm
01:51 Payments Bank.
01:52 Following that, we had the 15th of February when RBI issued a letter to Visa and said
01:59 that certain commercial card transactions, commercial credit card transactions that were
02:02 happening in the economy were not kosher and they needed to be stopped.
02:07 Come again a few weeks later on the 4th of March where the RBI issued another press release
02:13 talking about IIFL finance where it said that there were issues with the way gold loans
02:18 were being given out by IIFL finance.
02:22 There were problems with the valuation of the gold.
02:23 There were problems with the systems and processes that IIFL finance had and therefore that business
02:28 also needs to be stopped.
02:30 Now if you look at how this is panned out, now of course, JM Financial as you can see
02:35 has seen similar kind of an action stopping the shares and debentures lending business.
02:39 If you see how the RBI is actually looking at all of these problems, typically in history
02:46 we have seen the RBI issue some kind of a penalty or levy some kind of a penalty on
02:52 sector violators and then ask them to rectify those problems.
02:57 Now the RBI is saying we will find the problems.
02:59 We will come to you and we will tell you, you need to fix A, B and C and we will give
03:03 you a certain amount of time.
03:04 If you are unable to fix those problems or you are unwilling to act on the advisory of
03:10 the Reserve Bank of India, then there will be some strict action taken against you.
03:14 In these cases we have seen business restrictions being put up on these sectors, on these companies.
03:22 Broader action by the RBI seems to be that there is a need to take certain stricter measures,
03:29 not just monetary penalty but also business restrictions because that's the only thing
03:32 that hurts companies and that's why people will go out and actually take the action that
03:38 the RBI wants them to take.
03:40 Now let's take a look at what the RBI has been saying.
03:44 The RBI Governor in December when, apologies, in February when there was a monetary policy
03:51 announcement that was happening, the Reserve Bank of India Governor was pointing out that
03:55 they are taking action which is not knee-jerk in nature.
03:59 In fact this is a very reasoned action that they take against entities.
04:02 This was just days after the RBI's action on Paytm Payments Bank.
04:06 So the RBI Governor said that we do not take these actions out of will, we are not doing
04:10 this because we feel like it on one fine morning.
04:13 We are doing it after a lot of discussion and negotiation with entities.
04:16 I'll let you hear what the RBI Governor said during that Monetary Policy Committee speech.
04:23 Our emphasis is always on bilateral engagement with the regulated entities with focus on
04:29 nudging them for corrective action and sufficient time is given for undertaking such corrective
04:38 action.
04:39 The third point, when such constructive engagement which we undertake, when that does not work,
04:47 so when such constructive engagement does not work or when the regulated entity does
04:52 not take effective action, we go for imposing supervisory or business restrictions.
05:01 Number four, such restrictions which we impose are always proportionate to the gravity of
05:09 the situation.
05:10 Please take note that such restrictions are proportionate to the gravity of the situation.
05:19 Number five, all our actions, being a responsible regulator, being a responsible supervisor,
05:28 all our actions are in the best interest of systemic stability and protection of depositors
05:36 or customers' interest.
05:39 All right, so that was the RBI Governor explaining how the RBI decides on taking certain business
05:46 restriction actions on entities which are violating its rules.
05:50 Now after that, just this week, veteran banker Uday Kotak, he also spoke about the regulatory
05:55 guardrails and that excessive regulatory guardrails could impede economic growth.
06:01 He was speaking at an event organized by the National Financial Reporting Authority and
06:05 he said that there has to be a balance between the rulemaking and lawmaking.
06:09 Here's what he said.
06:12 If India is to grow, we must have as an example of growth aspiration, not talking in the context
06:19 of sector, but more sort of conceptually.
06:22 If India is to grow, we need a lot more cars on the road, we need a lot more roads.
06:28 But that has risks of accidents.
06:33 So how do we ensure that accidents don't happen?
06:37 One extreme way is to say I will not allow cars to, as many cars on the road.
06:43 I will not allow cars to drive more than 30 kilometers an hour or 40 kilometers an hour.
06:51 And I will not build more roads.
06:53 So I can manage a small system and I will have a better ability of controlling it.
07:01 But that is a conflict with our growth aspiration.
07:05 How do we manage both these levers?
07:07 The answer is pretty simple.
07:09 We must encourage a lot more traffic, a lot more roads, have better signals, better regulation,
07:17 and most importantly, a fast resolution mechanism should an accident happen.
07:24 I feel that I feel very, very optimistic for India's future.
07:31 But I'm also very conscious that and being a risk manager in my day life for a very long
07:37 time, that unbridled focus on the opportunity without having the guardrails also runs the
07:45 risk and too much of guardrail will not get us there.
07:51 All right, so that was Uday Kotak, one of the foremost voices within the financial sector
07:58 talking about how if you want to control accidents, you can't really stop cars from driving on
08:04 the road, essentially talking about where the financial sector is headed and whether
08:07 there's a need for the regulator to be so strict with people who violate rules or who
08:15 try innovation, which is not really harming other people, but may not be working with
08:19 the regulators point of view.
08:22 Of course, apart from this, we also need to understand where people who are affected by
08:28 these Reserve Bank of India directions, what they are feeling.
08:32 So I have is this RBI is the RBI harsh?
08:38 Now that's the question that that IFL finance might be asking and whether the practices
08:44 of IFL finance are unethical.
08:47 This is Nirmal Jain of IFL group who took a conference call with the analyst where he's
08:51 pointing out exactly how he sees the Reserve Bank of India's actions.
08:55 Listen in.
08:56 While the directive of RBI appears to be a bit harsh, I take a moment to express our
09:03 profound gratitude and admiration for the Reserve Bank of India.
09:07 Their steadfast commitment to ensure stability and integrity of our financial system is unfurled
09:12 with their proactive and prudent regulatory measures.
09:15 They have not only safeguarded the interests of all stakeholders and investors, but also
09:19 contributed significantly to the nation's economic growth and stability.
09:23 So the guidance and oversight provided by RBI are invaluable, fostering an environment
09:27 of such transparency and resilience across the financial landscape.
09:31 And we are grateful for their visionary leadership, unwavering support and guidance that inspired
09:36 us to meet our challenges with determination and strive for excellence in all our levels.
09:42 So we understand the concern that such news can generate amongst our stakeholders.
09:47 However, I want to make it unequivocally clear that there are no governance or ethical issues
09:53 at play.
09:54 These are more operational and procedural issues and which we will address with all
10:00 our effort and sincerity.
10:02 Our foundation remains solid, which is built on trust and support that all its stakeholders
10:06 have generously extended over the years.
10:09 And I also want to assure that we are taking immediate and comprehensive steps to address
10:15 all the concerns raised by RBI.
10:18 Our team is committed to implement the necessary remedial measures, not only to comply with
10:23 the regulatory standards, but also to exceed them.
10:26 So our resolve to rectify the situation is unwavering and we are dedicated to navigate
10:30 this situation or this challenge with transparency and integrity and utmost respect for compliance
10:36 standards, regulations and principles that have guided us.
10:41 All right. So that was Nirmal Jain, founder and promoter of IFL Group.
10:45 Of course, he's saying that there were no unethical issues at IFL Finance and that whatever
10:50 problems that the RBI found were operational in nature.
10:53 We also had a chance to speak with Arun Kumar Purwar of IFL Finance.
10:57 He's on the board of the company, of course, on how long it will take the company to gain
11:01 back the market share that it has lost since the RBI imposed these restrictions on the
11:05 company's gold loan resource and business.
11:07 Listen in to what Mr. Purwar had to say.
11:11 We are making efforts to ensure that we are able to convince RBI about our stance, about
11:18 our compliance and about our corrections, corrective measures which we have taken and
11:23 corrections which we have already done.
11:25 Having said that, there is an advantage with our organization that in terms of IT, our
11:30 organization can compete very effectively with the market.
11:33 We have very good sound IT systems in place.
11:37 So, once RBI lifts and permits us to start the business, I think it won't take much
11:43 time for organizations to come back to business in a very fast manner and regain whatever
11:50 market share we are losing today.
11:52 I don't expect that any loss of market share will be there in 2025 or 2026.
11:58 Our IT systems are so robust that we have an advantage with our competitors.
12:06 That was Deepak Purwar talking about how exactly, I apologize, A.K.
12:12 Purwar who was talking about how exactly the IFL finance business will recover.
12:16 We also spoke to Deepak Shinnoy, founder of Capital Mind a little earlier today and let's
12:21 listen in to what he had to say about the regulators' action against GM Financial
12:25 which came last evening.
12:26 I don't think HMI's or even these guys have access to much, honestly a lot more information
12:32 because otherwise they make money for themselves instead of giving it away to other people.
12:36 But to be honest, one of the things that happens in these cases is a self-propagating thing.
12:42 So, you get one IPO to go 100x and every IPO wants to go 100x and so on.
12:47 The problem here is not of retail investors.
12:50 I think the RBI is bridging and I like that, is systemic leverage which increases dramatically
12:58 during an IPO and then fades away immediately after because, so if you look at for instance
13:03 GM Financial and all that, they only reveal the results once a quarter.
13:06 If they were doing weekly results for whatever reason, you would notice on these IPO weeks
13:11 their balance sheet would increase dramatically and then come back down.
13:14 This was done because they were thinking, this is the power of authority to the underlying account.
13:19 This money doesn't go anywhere.
13:21 It is just kept in a bank account and that bank account will be used only to fund the
13:26 IPO and not for anything else.
13:28 What if there is a court issue, there is something that happens with an IPO, SEBI stops the IPO
13:33 for instance from and you know the money of the investors is stuck for two weeks.
13:37 You have a problem.
13:38 The leverage is so much, it was never intended to be given in the first place.
13:42 It will not just affect the NBFC, it will affect everybody in the financial system.
13:46 People who have lent to the NBFC, the HNIs themselves, other stuff.
13:50 So, that's where the problem is I think.
13:52 Everything else seems to be a smoke screen.
13:54 I may be wrong here.
13:56 Deepak Shannoy has been some strong views on how exactly IPO financing has been structured
14:02 in India and why it's a problem and why the RBI may not be wrong in taking action against
14:07 EM Financial.
14:08 We will take a quick break and on the other side we will take the big story forward with
14:12 some conversations that are ongoing on the topic with some financial sector experts.
14:16 Thank you.
14:18 [Music]
14:21 Hi sir.
14:46 Mr. Kumar.
14:47 Mr. Kumar, hi.
14:54 I can't hear him.
15:15 Mr. Kumar, hi.
15:16 Can you hear me?
15:17 Mr. Kumar, hi.
15:21 There's a problem.
15:24 [Pause]
15:48 Mr. Kumar, hi.
15:50 Hello.
15:52 Hi sir, Vishwanath here.
15:53 Yes, Vishwanath.
15:54 Hi, hi.
15:55 We will start in like half a minute.
15:58 Okay.
15:59 But essentially, point of the conversation is just to take us through what exactly the
16:04 RBI is thinking in all these rules, in all these restrictions that they have put in.
16:10 Just going to take that in slight more detail.
16:13 So, just let us know whatever your thoughts are.
16:15 Yeah.
16:16 Okay.
16:17 Okay.
16:18 Done.
16:19 [Pause]
16:23 [Pause]
16:27 [Pause]
16:31 [Pause]
16:35 [Pause]
17:02 [Pause]
17:05 All right.
17:09 Welcome back to The Big Story.
17:10 Of course, we are discussing the story about the Reserve Bank of India's actions against
17:14 financial sector violators and how exactly the RBI has been taking strict actions against
17:19 certain companies who have been bending or breaking rules that the RBI has set for the
17:23 game.
17:24 To discuss this topic further, I have with me Mr. Rajesh Kumar, a non-executive chairman
17:28 of MasterCard India, chairman at Bharatiya and of course, former chairman of State Bank
17:33 of India.
17:34 Mr. Kumar, welcome to this conversation.
17:36 Pleasure talking to you, sir.
17:37 Thank you.
17:38 Thank you for inviting me on this discussion.
17:40 Mr. Kumar, I wanted to ask you this question.
17:43 When you see the kind of statements that are coming from the Reserve Bank of India, NBFCs,
17:48 Payments Bank, all of these entities facing severe restrictions on their businesses, how
17:54 do you see this?
17:55 Because, you know, in the past, we are used to seeing the RBI levy monetary penalties,
17:59 but now it's coming more strongly against these kinds of violations.
18:04 Yeah, no, the message is very clear that if there are rules, then those rules are to be
18:10 followed.
18:11 And what is their internal report or what has transpired before such action has been
18:19 taken?
18:20 So, you and me are not privy to that, but there is a presumption that when RBI inspection
18:26 takes place or when they find that there is something which is not being done in accordance
18:32 with the regulations they have laid out.
18:35 Normally, it is a practice that time is given to do the course correction.
18:40 And if course correction is not done, then there can be monetary penalty and but there
18:48 can be action more than leaving any monetary penalty.
18:53 Monetary penalty is a new phenomena, which is just four or five years old.
18:58 RBI did not have a system of leaving monetary penalty.
19:03 But like RBI has very wide powers, let us admit it when it comes to enforcing the regulations
19:11 as far as the financial system is concerned.
19:14 Yeah.
19:15 Yeah.
19:16 All right.
19:17 Coming through, coming and looking at it from a broader lens now, back in November of last
19:22 year, they started with unsecured loans, then they went after AIFs.
19:27 Since then, they have gone with P2P lenders who were acting out of order.
19:32 They have gone after a card network that was supporting transactions which were not kosher.
19:37 I am speaking about actions that they have taken outside of these three entities that
19:41 which have come out in the last few weeks.
19:45 Is this, is it fair to say that these are probably the more vulnerable areas in the
19:50 financial sector at this point in time and the RBI is sort of plugging those stops before
19:55 anything bad happens?
19:57 Yeah, obviously, one of the like major responsibility which rests on the shoulders of the Reserve
20:02 Bank of India is the stability of the financial system.
20:05 And if there is a risk is building, then they would not like that situation to go out of
20:13 proportion.
20:14 And that is where the regulatory action is a preemptive action.
20:20 When it comes to unsecured loans, for example, it is more of a preemptive action because
20:25 the growth was much faster than the other type of loans or the system.
20:31 So obviously, RBI feels that a risk is building in the system and that is where they took
20:37 certain steps.
20:39 Some are about like non-compliance issues.
20:43 And so two are different.
20:46 One is that anticipating that the risk may build in the system.
20:51 So just not allow that to happen.
20:54 Second is about that if we have laid down a rule or a regulation, you better comply
20:59 with it.
21:00 Yeah.
21:01 Yeah, got that.
21:02 I want to ask you one more question if I let you go.
21:05 But into your mind, when you put yourself in the shoes of the regulator, how exactly
21:09 do you see the current system, because the RBI has always maintained that the financial
21:14 sector in India is safe, is stable.
21:16 There is actually no imminent risk that may put that into question.
21:22 Having said that, now there are violators that the RBI is identifying and specifically
21:27 taking action against.
21:28 How do you correlate these things if you were to put yourself in the shoes of the regulator?
21:32 Yeah, no, overall, there is no issue around the overall safety of the system.
21:40 And banks were never in such a good shape as they are today.
21:46 And that has been a very painful process through which the banking system has come out and
21:53 reached a state where we can say that our banks are safe.
21:59 And similarly, these regulators have to be mindful of the impact which any other player
22:10 in the system can cause a problem to the system.
22:13 Yeah.
22:14 So that's where I think more attention is being paid to NBFCs and fintechs, because
22:21 the oversight on banks is always more.
22:25 And the number of players, say, for example, NBFCs, there are nearly approximately more
22:32 than 9500 NBFCs in the country.
22:35 So regulating them all is not easy.
22:40 So that is where a scale based regulation came in.
22:43 Larger ones will receive more attention and the regulatory arbitrage between the NBFC
22:49 and bank is disappearing.
22:51 So I think the approach seems to be that take such action, which has a demonstration impact.
23:01 And if you take some action against, say, the bigger ones and take the action, which
23:08 is seemingly harsh, but that also sends out a message.
23:16 And when everybody will start behaving.
23:19 OK, I know I said the last question, but I want to ask one more point.
23:24 Is there a fear of spooking the market?
23:27 Because these entities are listed.
23:30 And if you take these kind of serious action restrictions on the businesses, does that
23:35 sort of scare investors too much, even though this might be temporary in nature, technically
23:39 speaking?
23:40 No, I think if for investor confidence, it's important that the players in the ecosystem,
23:48 they are following the rules.
23:50 Yeah.
23:51 So short term, maybe.
23:53 But ultimately, if the investors know that there is a strong regulatory oversight, then
24:01 probably it will give more confidence to the investors rather than reduce.
24:05 All right, Mr. Kumar, thank you so much for joining us on this conversation.
24:09 As always, a pleasure talking to you.
24:11 And thank you so much, viewers, for watching the big story on NBFC Profit.
24:15 Stay tuned.
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