Not Regulator’s Job to Take Decisions for Banks’ Boards: RBI Governor Sanjay Malhotra

Reserve Bank of India Governor Sanjay Malhotra said on Friday that it is not the regulator’s job to take decisions for bank boards.

Last month, the RBI 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.

The financial health of Indian banks has improved in the last decade and they also have more freedom in terms of doing business. While addressing the SBI Banking and Economics Conclave, Malhotra said, “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.”

He further said, “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.”

According to a Business Standard report, allowing banks to finance acquisitions is acknowledged worldwide as an important part of an evolved financial system and it helps in the better allocation of financial resources. At the same time, there are also certain 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,” the RBI Governor noted.

He also said that 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.