 "If bank boards aren't capable, nothing much can be done: K C Chakrabarty")
Reserve Bank of India Deputy Governor K C Chakrabarty says the central bank has not found any evidence of illegal or irregular transactions by banks, as alleged by Cobrapost. In an interview with Manojit Saha, he also said banks may have indulged in “traffic rule violations” but “no accident has taken place”. Edited excerpts.
Irrespective of what Cobrapost has alleged, do you think the more basic issue is mis-selling of financial products by banks?
Whenever there is selling, there will be some mis-selling. We need to have adequate guidelines on what is mis-selling. There is no mis-selling of banking products in this case. The other regulators have to create their own guidelines in this regard. In banking, the only thing that could be mis-sold is loan. If banks mis-sell loan, only they will suffer.
So far as reputation is concerned, the board and the management of the bank is the first line of defence. If they don’t bother for their reputation, who else can? Also, reputation will be hampered if one or two banks do it. If everyone indulges in this, where is the issue of reputation? What we need in such cases is systemic change. We need to frame guidelines to prevent mis-selling. We also need to educate the customer. The customer should understand why he/she is buying the product. We can disallow banks from selling such products, but that will be the last step.
My basic question is why should banks take so much commission in selling insurance/mutual fund products. What is the extra cost that the bank is incurring? The full benefit of the commission/reduction in cost, if any, should go to the customer. Only then, the penetration of such products would happen.
Banks selling para-banking products is a serious concern from the customer protection point of view and not from bank’s reputation point of view. What we feel is that the customer’s interest is being sacrificed. We also have serious concern about banks selling gold coins. It reduces the deposit growth. If deposits don’t grow, banks increase the lending rate. That creates more problem…monetary transmission gets affected. We have raised all these issues and also expressed our concern to banks.
Is RBI thinking of putting some restrictions on banks selling gold coins?
Personally, I am very clear that banks should not sell gold coins, though that may not be the stated policy at present. The banks have already been advised to exercise restraint in selling gold coins.
RBI had initiated a probe following the Cobrapost allegations. What are the conclusions?
There are some traffic rule violations but no accident has taken place. As of now, we have no evidence of any illegal or irregular transaction.
How do you react to the criticism that Indian regulators are reactive, and not proactive?
Around the globe, regulators have been reactive only. But there are enough guidelines on what banks need to consider while introducing a new product. When the system is evolving, the guidelines have to change with time. Sometimes, we may not able to keep pace. At the same time, if we become too proactive, we will kill innovation and if we are slow in taking action, then we will be encouraging violation. There is a thin line between what is innovation and what is violation. The challenge before any regulator is to maintain a balance between them.
How far have you succeeded in maintaining the balance?
We may say that we have succeeded as no major accident has taken place but someone may also say no progress has taken place as our insurance and banking penetration is very low. These are all different ways of looking at the same issue.
The other criticism that RBI faces is that Indian financial sector is over regulated but under supervised
In a country, if everybody violates the law, you cannot say supervision is wrong. There may be something wrong in the rule/structure. There cannot be over-regulation and under- supervision. There may be under-regulation and over-supervision. So far as banking supervision is concerned, in my view, there is no lapse in supervision. But, our supervision needs to keep pace with time and with the changes that are happening in the market place. On a more general note, regulation and supervision are found to be lax across the world. That is why the financial crisis happened. World over, there is an effort to strengthen regulation and supervision.
In some of your speeches, you have mentioned that the corporate debt restructuring mechanism has been misused. How do you plan to address the problem?
Restructuring is a perfect commercial phenomenon practised across the world. It is like a medicine, but it has to be used judiciously. If you don’t use it properly, it will not give you the result. If banks are taking undue advantage, then banks are going to suffer.
You had also raised the issue that when a chairman of a public sector bank retires, NPAs rise. Is there any plan on how to tackle this issue?
Why blame the chairman only? He is not the only one who finalises the balance sheet. What is the board doing? Representatives from Finance Ministry and RBI are also there on the board. Why don’t we take action against the entire board? Earlier, we had no power. But now that the Banking Regulation Act has been amended, we have more power. Now, we can remove members of the board, including our own people. That is why I am advocating that our people should not be on bank boards. But this would need amendment in the Bank Nationalisation /SBI Act. In a bank, the board is the first line of defence, for proper corporate governance. If the board is not capable, nothing can be done.
So you are saying there is concern with the banks’ boards?
Yes, definitely. We need to see how the selection and appointment of board members is done? Are they Fit and Proper? There are many issues encompassing the entire gamut of governance of bank boards.
Do these concerns extend to private bank boards also?
We don’t differentiate on the basis of public or private ownership. In banking, performance is ownership-neutral. For us, all banks are same. What is important is the quality of management and quality of the boards.
In India, most public sector banks are driven by the chairman. RBI is also a part of the selection process. So, if a chairman cannot deliver, are you saying RBI also has to take responsibility?
Personally, I agree. That is why I have said, RBI should not be a party to the selection process. However, this again would require amendment to the Bank Nationalisation Act/SBI Act.
In this falling interest rate scenario, banks and home loans companies have seen asking customers to pay fee to shift to lower interest rate. Since those are floating loan rates, should they not automatically come down when the benchmark rate falls?
We are telling banks to disclose the Annual Percentage Rate (APR). Whatever one time charge and other charges you levy on the customer, take into account all that and arrive at an annual interest rate, which should include all the charges. Disclosing APR is regarded as a global best practice. We have already suggested this. The Indian Banks' Association has to work it out. Each bank has to do their part and work out a methodology. We are telling the banks to advertise their APRs and not interest rate, in newspapers/publicity materials.
When overall interest rate goes up, all banks are happy to increase their lending rate. But in a falling interest rate scenario, they only extend the benefit to new customers.
Existing customers can seek redress under the banking ombudsman scheme of RBI if they think they are not being treated on par with the new customers. We have already said that discriminating between old and the new customers in the matter of pricing is a wrong practice.
Why isn’t monetary transmission taking place?
Monetary transmission is not taking place anywhere in the globe because of the financial crisis. There is lack of confidence on what is going to happen tomorrow. Even in the developed markets like the UK and Europe, interest rates are very low but SMEs/other consumers are not getting loans. People don't believe what the central bank says or what the market says. The entire LIBOR scandal is a reflection of that. It is not only happening in this country, it is happening everywhere.
Indian banks say that their cost of funds is not coming down.
I have a counter-question. How are banks’ margins going up or remaining the same even while NPAs are going up? In September, 2008, the repo rate was 9%, CRR was 9%, and BPLR was 13.75-14%. After four and a half years, CRR has come down to 4%, repo is 7.25%. But the BPLR of most banks today continues to be above 14%! Assuming 20% of customers still on BPLR, why is there no transmission for them. Further, who is responsible for the high cost of funds?
Why then RBI isn’t invoking the sunset clause on BPLR so that all customers shift to base rate? Banks have been demanding that for a long time.
Why aren’t banks invoking that themselves? No one has prohibited them from invoking the sunset clause. If RBI does it, we would be accused of micromanaging.
Irrespective of what Cobrapost has alleged, do you think the more basic issue is mis-selling of financial products by banks?
Whenever there is selling, there will be some mis-selling. We need to have adequate guidelines on what is mis-selling. There is no mis-selling of banking products in this case. The other regulators have to create their own guidelines in this regard. In banking, the only thing that could be mis-sold is loan. If banks mis-sell loan, only they will suffer.
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But won’t the reputation risk of banks will be at stake if their branches indulge in something like that?
So far as reputation is concerned, the board and the management of the bank is the first line of defence. If they don’t bother for their reputation, who else can? Also, reputation will be hampered if one or two banks do it. If everyone indulges in this, where is the issue of reputation? What we need in such cases is systemic change. We need to frame guidelines to prevent mis-selling. We also need to educate the customer. The customer should understand why he/she is buying the product. We can disallow banks from selling such products, but that will be the last step.
My basic question is why should banks take so much commission in selling insurance/mutual fund products. What is the extra cost that the bank is incurring? The full benefit of the commission/reduction in cost, if any, should go to the customer. Only then, the penetration of such products would happen.
Banks selling para-banking products is a serious concern from the customer protection point of view and not from bank’s reputation point of view. What we feel is that the customer’s interest is being sacrificed. We also have serious concern about banks selling gold coins. It reduces the deposit growth. If deposits don’t grow, banks increase the lending rate. That creates more problem…monetary transmission gets affected. We have raised all these issues and also expressed our concern to banks.
Is RBI thinking of putting some restrictions on banks selling gold coins?
Personally, I am very clear that banks should not sell gold coins, though that may not be the stated policy at present. The banks have already been advised to exercise restraint in selling gold coins.
RBI had initiated a probe following the Cobrapost allegations. What are the conclusions?
There are some traffic rule violations but no accident has taken place. As of now, we have no evidence of any illegal or irregular transaction.
How do you react to the criticism that Indian regulators are reactive, and not proactive?
Around the globe, regulators have been reactive only. But there are enough guidelines on what banks need to consider while introducing a new product. When the system is evolving, the guidelines have to change with time. Sometimes, we may not able to keep pace. At the same time, if we become too proactive, we will kill innovation and if we are slow in taking action, then we will be encouraging violation. There is a thin line between what is innovation and what is violation. The challenge before any regulator is to maintain a balance between them.
How far have you succeeded in maintaining the balance?
We may say that we have succeeded as no major accident has taken place but someone may also say no progress has taken place as our insurance and banking penetration is very low. These are all different ways of looking at the same issue.
The other criticism that RBI faces is that Indian financial sector is over regulated but under supervised
In a country, if everybody violates the law, you cannot say supervision is wrong. There may be something wrong in the rule/structure. There cannot be over-regulation and under- supervision. There may be under-regulation and over-supervision. So far as banking supervision is concerned, in my view, there is no lapse in supervision. But, our supervision needs to keep pace with time and with the changes that are happening in the market place. On a more general note, regulation and supervision are found to be lax across the world. That is why the financial crisis happened. World over, there is an effort to strengthen regulation and supervision.
In some of your speeches, you have mentioned that the corporate debt restructuring mechanism has been misused. How do you plan to address the problem?
Restructuring is a perfect commercial phenomenon practised across the world. It is like a medicine, but it has to be used judiciously. If you don’t use it properly, it will not give you the result. If banks are taking undue advantage, then banks are going to suffer.
You had also raised the issue that when a chairman of a public sector bank retires, NPAs rise. Is there any plan on how to tackle this issue?
Why blame the chairman only? He is not the only one who finalises the balance sheet. What is the board doing? Representatives from Finance Ministry and RBI are also there on the board. Why don’t we take action against the entire board? Earlier, we had no power. But now that the Banking Regulation Act has been amended, we have more power. Now, we can remove members of the board, including our own people. That is why I am advocating that our people should not be on bank boards. But this would need amendment in the Bank Nationalisation /SBI Act. In a bank, the board is the first line of defence, for proper corporate governance. If the board is not capable, nothing can be done.
So you are saying there is concern with the banks’ boards?
Yes, definitely. We need to see how the selection and appointment of board members is done? Are they Fit and Proper? There are many issues encompassing the entire gamut of governance of bank boards.
Do these concerns extend to private bank boards also?
We don’t differentiate on the basis of public or private ownership. In banking, performance is ownership-neutral. For us, all banks are same. What is important is the quality of management and quality of the boards.
In India, most public sector banks are driven by the chairman. RBI is also a part of the selection process. So, if a chairman cannot deliver, are you saying RBI also has to take responsibility?
Personally, I agree. That is why I have said, RBI should not be a party to the selection process. However, this again would require amendment to the Bank Nationalisation Act/SBI Act.
In this falling interest rate scenario, banks and home loans companies have seen asking customers to pay fee to shift to lower interest rate. Since those are floating loan rates, should they not automatically come down when the benchmark rate falls?
We are telling banks to disclose the Annual Percentage Rate (APR). Whatever one time charge and other charges you levy on the customer, take into account all that and arrive at an annual interest rate, which should include all the charges. Disclosing APR is regarded as a global best practice. We have already suggested this. The Indian Banks' Association has to work it out. Each bank has to do their part and work out a methodology. We are telling the banks to advertise their APRs and not interest rate, in newspapers/publicity materials.
When overall interest rate goes up, all banks are happy to increase their lending rate. But in a falling interest rate scenario, they only extend the benefit to new customers.
Existing customers can seek redress under the banking ombudsman scheme of RBI if they think they are not being treated on par with the new customers. We have already said that discriminating between old and the new customers in the matter of pricing is a wrong practice.
Why isn’t monetary transmission taking place?
Monetary transmission is not taking place anywhere in the globe because of the financial crisis. There is lack of confidence on what is going to happen tomorrow. Even in the developed markets like the UK and Europe, interest rates are very low but SMEs/other consumers are not getting loans. People don't believe what the central bank says or what the market says. The entire LIBOR scandal is a reflection of that. It is not only happening in this country, it is happening everywhere.
Indian banks say that their cost of funds is not coming down.
I have a counter-question. How are banks’ margins going up or remaining the same even while NPAs are going up? In September, 2008, the repo rate was 9%, CRR was 9%, and BPLR was 13.75-14%. After four and a half years, CRR has come down to 4%, repo is 7.25%. But the BPLR of most banks today continues to be above 14%! Assuming 20% of customers still on BPLR, why is there no transmission for them. Further, who is responsible for the high cost of funds?
Why then RBI isn’t invoking the sunset clause on BPLR so that all customers shift to base rate? Banks have been demanding that for a long time.
Why aren’t banks invoking that themselves? No one has prohibited them from invoking the sunset clause. If RBI does it, we would be accused of micromanaging.