The RBI has therefore set up a working group consisting of four officers from the Bank, two from the ministries of finance and law, and the Registrar of Companies. It is to be feared that this group will confirm the prejudices of the RBI on this matter. The fact is that the Supreme Court misread the context of the UK legislation. Banks in many countries are an oligopoly regulated by a central bank. Britain threw this model overboard, and allowed other financial companies to take on banking functions "" to offer depositors chequeing facilities and instant withdrawal. Separately but around the same time, the Bank of England abandoned the use of liquidity ratios. In the next few years, the distinction between bank and non-bank financial institutions dissolved, and non-bank institutions took on the responsibility of offering fully liquid deposit accounts. It was in this context that deposit insurance also needed to be extended to the new near-banking institutions.
The situation could not be more different in India. Governmental borrowing from banks at low rates and official restrictions on bank lending have put banks at a disadvantage in competition with other financial institutions, which have grown apace in the past five years. In NBFCs, the RBI has seen a new business opportunity, and has tried to bring them under regulation. It tried to make them register, and to institute a few simple regulations for those registered, such as a cash reserve ratio. But most NBFCs did not register. More recently the RBI has tried to put new restrictions on NBFCs, but also dangled a carrot "" deregulation of interest rates for financial companies registering with it. This is how Reliance Capital has trumpeted its forthcoming offer of 20 per cent on five-year deposits and queered the pitch of Tata Steel and Larsen and Toubro bonds. However, the RBI does not allow manufacturing companies to offer more than 15 per cent, presumably on the theory that deposits going directly to them would be disintermediation and would deprive the banks of business. This has only led manufacturing companies to borrow indirectly; thousands of small finance companies are collecting deposits for them and openly offering interest rates up to 21 per cent. All the RBI has achieved is to make a perfectly normal business illegal: the interest in excess of 15 per cent is offered in cash under the counter. This is not a game the RBI can win; it needs to rethink its business strategy in the new environment.