It's not regulator's job to take decisions for banks' boards: RBI Governor

Reserve Bank of India Governor Sanjay Malhotra said on Friday it is not the regulator’s job to take decisions for bank boards, speaking in the context of a wide range of reforms announced during the October review of the monetary policy.

The central bank last month announced 22 measures, including allowing banks to finance acquisitions, increasing limits on loans against shares, and laying out draft norms for transitioning to expected credit loss (ECL) framework for loan loss provisioning.

Indian banks’ financial health has improved in the last decade and they also have more freedom to do business. “No regulator can, or should, substitute for board room judgment. Especially, in a diverse country like ours, each case, each loan, each deposit is different — different risks, different opportunities,” Malhotra said at the SBI Banking and Economics Conclave.

“We need to allow regulated entities to take decisions based on merit of each case rather than prescribing a one size fits all rule. This will enable regulated entities to experiment and innovate, learn and improve.”

Allowing banks to finance acquisitions is acknowledged worldwide as an integral part of an evolved financial system and it helps in the better allocation of financial resources. At the same time, there are restrictions to ensure safety.

“Removal of the restrictions (on financing acquisitions) by the banks will benefit the real economy and as the draft has guardrails like limits on bank funding which is 70 per cent of the deal value, aggregate exposure limits relative to Tier-1 capital of the bank, eligibility criteria which will ensure safety while allowing banks and their stakeholders to reap benefit of additional business.”

Recent regulatory measures should be seen in the context of better financial health of banks, like higher capital adequacy ratio, asset quality and improved profitability, he said.