The banking regulator Reserve Bank of India (RBI) is planning to announce a new guideline on January 4th which will give the regulator a new “supervisory” role on pricing of products made by banks. It may be noted, at present the banks are free to fix their own prices.
Speaking on the sidelines of a book launch, organised by IOB at Chennai today, K C Chakrabarty, Deputy Governor, RBI said “on January 4th, when the RBI Governor address the Ombudsman conference, an announcement on the new guideline will be made”.
While refusing to share any details on the new guideline, he said, globally supervisory role addresses consumer protection issues and it was one of the agendas of G20 reform.
What we will look is whether there is any discrimination among the customers and Banks must convince that the pricing of products was based on proper risk management and what was the logic behind it.
Asked whether the RBI wants to take control of pricing again, he said, “all we are asking is whether you are doing the right thing and examine that. Look at risk based pricing, if you (Banks) charge too much interest rate, good customer will not come. When the prices are too high, entire society is blaming RBI only and I am not happy about that. If price become exploratory, then we will intervene as we did in microfinance,” siad Chakrabarty.
For instance, Banks gives education loan at 17%, while housing loan is at 10.5%. Which is more important? Education will change the fortune of the country. Banks must explain the risk perception based on which they charge. He also said, today A rated borrower SME gets money for 13% interest, whereas a loss making company which are in the C or D category borrows at 9-10%.
Today compare to other modes of funding, Banks rates are much cheaper, no doubt about it. All we are asking the Banks is proper risk management, pricing, understanding customer needs, do not discriminate when it comes to pricing and even it happens when it comes to restructuring.
“A board approved proposal quickly gets restructured, but a Bank manager approved loan is not. Data indicates that the large borrowers have invariably received the benefit of restructuring loans, while the restructuring in case of SME/ agriculture loans have remained abysmally low”.
The idea is more consumer protection issue, it doesn't mean today it is not relevant now. We are giving a little way now. Today we cannot take action, this will not work, the need of hour is persuasion. When 90% of the people gets banking service, then the issue will be more relevant.
On NPA, he said, the ability to manage NPAs is important. An attitude of complete risk aversion would also not be appropriate as banks are in the business of taking risks, but with adequate safeguards. Rising impaired assets is a “governance” issue as banks have forgotten the art of saying 'no' except to small borrowers. Banks need to significantly improve their risk assessment capability and their ability to price risks, so that they take on only those risks that they understand and can efficiently manage.
“I believe that this need is all the more pronounced in the case of public sector banks, which, at times end up with assets that have been excited by private sector/ foreign banks on account of inherent weaknesses”.
Word of caution for new banks
For those who are waiting for banking licence, once the RBI's guidelines comes, better reconsider it, if they are looking the foray for a profitable business, since banking is not meant to make big profits. This was the message from the Reserve Bank of India (RBI's) Deputy Governor K C Chakrabarty.
Speaking at a book release function, organised by Indian Overseas Bank, he said that people feel that if Banks generate profit, that mean banks is efficient. But if the banks make too much profit, economy will become insufficient. If Banks makes too much money, then customers are losing money. So Banks making too much money is very danger.
“So those who are ready and waiting for licence from RBI reconsider it, since it is not a very very profitable business. Having said that banks need to make profit because capital is required," he said.