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RBI likely to focus on micro-regulations in credit policy

BS Banking Editor

A rogue stockbroker and a little-known co-operative bank have derailed the banking sector reforms. The Reserve Bank of India, which has been shying away from shop floor management of Indian banks over the last few years, seems to be left with no choice but to shift its focus from macro overview to micro regulations in its forthcoming credit policy, to be unveiled on April 19.

The man responsible for this apparently retrograde step is Ketan Parekh, who abused the system, pulled down Madhavpura Mercantile Co-operative Bank and was allegedly involved in the Rs 1.37-billion pay order scam that has rocked Bank of India. At this juncture, addressing the structural issues is likely to take the back seat.

The task is cut out for the central bank: it is gearing up to put in place rules for micro management, including on discounting of pay orders and broker-specific capital market exposure.

The underlying theme of the policy is likely to be micro regulations laced with risk management. It may even bring back the inspector raj since some of the banks' boards have failed to adhere to the laid down norms.

Till about a month ago, the dilemma before the Indian central bank was whether to cut or not to cut the bank rate (as well as banks' cash reserve ratio) against the backdrop of the US Federal Reserve's frequent cuts in rates. But all that has been dramatically changed by Ketan Parekh.

First, it was discovered that even though the system was safe, a few banks had thrown to the winds all prudential norms and taken excessive exposure in one broker.

Then came news of the Ahmedabad-based co-operative bank, which had borrowed from the overnight call market to lend to the stock markets. The climax was reached when Bank of India filed a case against Parekh and Madhavpura with CBI, leading to the arrest of both Parekh and the Madhavpura bank's managing director.

Issues like rate cuts and restructuring of the overnight market to make it an exclusive inter-bank market are on the agenda of the RBI. However, they are overshadowed by immediate concerns such as banks' capital market exposure, regulation of co-operative banks, discounting of various instruments, inter-bank exposure etc. The RBI is also expected to take a close look at the payments system and put in place a sound mechanism for counter-party risks.

The central theme of the policy will be risk management, and the RBI will lay down every possible norm in this regard. For instance, it may tell commercial banks how much exposure they can take in a co-operative bank or to what extent it can discount an instrument issued by a co-operative bank. It is also likely to jack up the margin for loans against shares and spell out broker specific exposure limits. In a way, it is turning the reforms clock backwards.

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