A Careful Approach

With the RBI calling for comprehensive regulations to govern connected-party lending, it wants to pre-empt any misadventure in the financial sector

- ANAND ADHIKARI

BANKING

THE RESERVE BANK of India (RBI) has found that cooperative banks are regularly flouting norms related to ‘loans and advances to directors, their relatives, and firms/concerns in which they are interested’. While instances of such lending are not prevalent among commercial banks, with the entry of non-banking financial companies (NBFCs) backed by corporate giants, India’s banking regulator seems unsure if the current regulations are sufficient to prevent any future misadventure. Incidentally, the RBI has always pooh-poohed the idea of allowing corporates to run commercial banks, citing their poor track record in upholding governance standards.

The regulator’s other big worry is the proliferation of fintech firms that are getting into co-lending tie-ups with banks and NBFCs. The entry of large corporates into the NBFC space, coupled with the growing fintech universe, has the potential to create complicated layers of lending, which may make it difficult for the regulator to track connected party lending. Responding to the emerging situation, the RBI has now called for a comprehensive framework to govern such lending, which would apply uniformly to all regulated entities of the RBI.