Phase out regulatory arbitrage: McKinsey

Indian banking regulators need to remove the regulatory arbitrage between banks, non-banking finance companies (NBFCs) and other financial entities, McKinsey & Company said in its whitepaper on domestic banking industry.

Removal of regulatory arbitrage will stop activities such as banks setting up NBFCs to provide fund-based and non-fund based services which are not allowed for banks, said Joydeep Sengupta, partner, McKinsey.

A host of banks, including HDFC Bank and IndusInd Bank, has sought permissions for setting up NBFCs, while many banks already have NBFCs tapping the specific business opportunities.

In its white paper titled Indian Banking 2010 - Towards a High-Performing Sector, McKinsey said the banking sector will need Rs 7,50,000 crore of capital in a scenario where managements step up efforts to make far-reaching changes and policymakers intervene only to the extent required to ensure system stability and protection of consumers' interest.

Leo Puri, director, McKinsey, said banks need to recognise four key challenges that they would face over the next few years. First, they need to address the requirement of a new variety of skill sets. Secondly, they will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided.