In November 2020, an Internal Working Group (IWG) of the RBI came out with a recommendation for allowing large corporate and industrial houses to promote banks and permitting promoters to raise their stakes in the bank’s equity share capital from 15 per cent to 26 per cent. There was also a suggestion for allowing the conversion of large Non-Banking Finance Companies (NBFCs) (with over Rs 50,000 crore in assets) owned by the Corporate Houses into full-fledged Banks and payment banks into Small Finance Banks. The recommendations of the IWG have drawn scathing criticism from bankers, academics, economists, and even former RBI governor Raghuram Rajan. Raghuram Rajan, in a joint statement with former RBI deputy governor Viral Acharya had questioned the timing of this move and insisted that it is important to stick to the tried and tested limits on corporate involvement in banking. They both pointed towards the disastrous history of connected lending and allowing industrial houses to enter into banking would concentrate the economic and political powers with certain business houses. Debashis Basu, editor of Money Life, a leading financial magazine, wrote that before even considering any such move by the RBI, there are much bigger issues which need to be resolved first such as political interference, crony capitalism, lack of accountability, regulatory failures in dealing with NPA crisis and the need of repeated recapitalisation of Public Sector Banks (PSBs). Taking a cautious approach, he said that even if such a recommendation goes ahead, RBI using its regulatory powers effectively can ensure that things do not go out of hand. However, he also raised the caveat that if RBI turns out to be weak and inept then this can pose a much bigger risk. Even bank unions have staunchly opposed the IWG recommendations. C H Venkatachalam, General Secretary, All India Bank Employees Association (AIBEA) said that such a proposal by RBI would endanger the safety of people’s money in the banks. He alleged as how in the past many private banks owned and controlled by corporates and big business houses were mismanaged and failed, which led to people losing their precious savings. Venkatachalam also questioned the move saying that when big corporate houses are the biggest defaulters in the country, whether it would be prudent to allow the corporate houses to control banks. In order to tone down the criticisms received, the RBI governor Shaktikanta Das came up with the clarification that the IWG recommendations should not be seen as RBI’s point of view or decision. He insisted that the five-member IWG acted “independently” after deliberations and gave a certain point of view. The RBI governor added that RBI has not reached any decision yet and the central bank will go through the stakeholders’ and public comments before arriving at a “considered decision”. Considering how the decisions are usually taken by the regulators behind closed doors, the scepticism around IWG recommendations are not unwarranted.
Laxmi Vilas Bank Merged with DBS Bank
After struggling for a long time to improve Laxmi Vilas Bank’s deteriorating condition, RBI put Lakshmi Vilas Bank under moratorium on November 17 and proposed a draft scheme of amalgamation with DBS Bank India Ltd, a subsidiary of Singapore based bank. With a speedy sanction by Government of India, the moratorium was uplifted and Lakshmi Vilas Bank started operating as DBS Bank since November 27. While Moody supported the merger of LVB with a foreign bank, All India Bank Employees Association, LVB promoters and CPI General Secretary D Raja opposed the merger. LVB shareholders and India Bulls Housing filed petitions in four High Courts – Madras, Mumbai, Karnataka and Delhi whereas RBI has asked Supreme Court to shift all the cases to one place.
Government plans to bring back DFIs to fund Infrastructure Projects
Finance Ministry has proposed to convert IIFCL, now a non-deposit taking govt. owned non-banking finance company, into a DFI to lend for long term large infrastructure projects. With banks having high NPAs and less appetite to take more risks, the government is also reviewing the role of sector specific NBFCs like PFC, NHB, IREDA, Hudco, etc. and is planning to bring back a new Development Finance Institution (DFI) to finance rural infrastructure. In the past few decades, DFIs were slowly converted into banks and commercial banks took the role of DFIs with financing large projects which then resulted into a drastic rise in their Non-Performing Assets (NPAs). Now, the government is trying to bring back DFIs to finance the various projects under the proposed National Infrastructure Pipeline (NIP) but this should not repeat the same model of reckless lending with no due diligence and siphoning of public money to private companies with no proper recovery mechanisms.
PIL filed in Delhi High Court to formulate Regulations for FinTechs
Delhi high court has asked response from Centre, Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and National Payments Corporation of India (NPCI) on a PIL filed by Resmi P Bhaskaran, an economist. PIL claims that the absence of regulations for FinTech companies – many of them internationally established – and their operations, can adversely affect the financial stability of the country. The giant Fintechs have entered the financial market by partnering with existing entities and competing with regulated financial institutions without having to comply with the same requirements. The PIL has also asked to frame the regulations to ensure data collected by such companies is not monetized or used for other purposes.
Post Office Started Penalising Customers for not Maintaining Minimum Balance
In a major change regarding charges for its saving account holders, Post Office announced that such account holders need to maintain Rs 500 by December 11, failing which Rs 100 plus GST will be fined for account maintenance charges. It also barred the customers to withdraw money from their accounts that reduces the minimum balance below Rs 500 and accounts will be closed automatically if the balance becomes zero at some point of time. This comes at a time when people are already burdened by commercial banks with heavy charges on banking services. Banks introduced many new bank charges and increased existing charges drastically in last 4-5 years, after losing lakhs of crores of rupees to corporate loans. As of March 2019, Post Office had 18 crore saving accounts. Many people dependent on Post Offices in villages, remote areas and elderly will lose their small savings due to this change announced by Post Office.
RBI extended the restrictions on PMC Bank for three months
Reserve Bank of India extended the restrictions on the scam hit multi-state urban cooperative bank for three months till March 31, 2021. Punjab & Maharashtra Co-operative Bank (PMC Bank) has received four proposals after seeking Expression of Intent (EoI) for its reconstruction and is going to vet the proposals to recommend to RBI for the same. Initially, RBI had restricted the withdrawals with the limit of Rs 1,000, later increased to Rs 1 lakh per account.