S&P Global Ratings remarked on Tuesday that India's financial system overseer, the Reserve Bank of India (RBI), is demonstrating a significant dedication to improving governance and transparency within the sector. The recent actions taken by the RBI are aimed at reining in lenders' excessive enthusiasm, fostering a culture of compliance and protecting customers, although they may result in heightened capital costs for institutions.
These measures include imposing restrictions on IIFL Finance and JM Financial Products from providing gold loans and loans against shares, respectively, as well as directing Paytm Payments Bank (PPBL) to halt the onboarding of new customers. S&P highlighted the RBI's decision in December 2020 to suspend HDFC Bank from acquiring new credit card customers due to recurring technological disruptions, signaling a departure from past practices of issuing nominal financial penalties for breaches.
S&P Global credit analyst Geeta Chugh stated, "India's regulator has emphasised its commitment to fortifying the financial sector. However, the increased regulatory risk could hinder growth and raise the cost of capital for financial institutions."
According to S&P, the RBI's tolerance for non-compliance, customer grievances, data protection, governance, know-your-customer (KYC) norms, and anti-money laundering concerns has dwindled significantly. The central bank has opted to publicly disclose the key factors leading to suspensions or other stringent actions against relevant entities, and has become more vocal in identifying conduct deemed harmful to the interests of customers and investors. S&P noted instances of inadequate credit underwriting, overvaluation of collateral, and governance lapses in certain financial sector firms cited by the RBI.
Chugh emphasised, "We believe heightened transparency will exert additional pressure on the entire financial sector to improve compliance and governance standards."
S&P suggested that some retail loans, such as personal loans, loans against property, and gold loans, might be diverted to invest in stock markets, making it challenging to ascertain the end-use of funds in these products. Market participants speculate that both the RBI and the Securities and Exchange Board of India (SEBI) aim to safeguard small investors by scrutinizing these activities more closely.
"We anticipate regulatory actions will prompt banks and finance companies to place greater emphasis on policies and procedures, ultimately bolstering the operational resilience of the system. Nevertheless, this transition is likely to result in escalated compliance costs for the sector, potentially constraining smaller companies' ability to compete in the market," S&P concluded.