On most of the significant policy issues—implementation of Basle III, NBFC regulation, gold loan companies, securitisation guidelines, etc, all that we have in the policy are datelines for policies to be announced by the RBI. There is more in the offing than we have in the policy, reducing the much-awaited policy to be trailer for a movie to hit the screens

The financial markets in general anxiously wait for this—the Reserve Bank of India’s (RBI) Monetary Policy. The market looks for signals towards policy making by the RBI. However, but for the reduction in policy rates by 50 basis points (bps), on most of the significant issues where banks would like to see direction of policy by the RBI, the policy says—“to be announced”. On most of the significant policy issues—implementation of Basel III, NBFC regulation, gold loan companies, securitisation guidelines, etc, all that we have in the policy are datelines for policies to be announced by the RBI. Therefore, there is more in the offing than we have in the policy, reducing the much-awaited policy to be trailer for a movie to hit the screens.

Priority sector:
The Nair Committee’s far-reaching recommendations about priority sector treatment, particularly putting a limit of 5% to bought deals, securitisation and on-lending by banks to the priority sector, has not yet been accepted by the RBI. The policy says that the report has been placed on website of the RBI for comments, and that the RBI will take an action after examining feedback. If there was an immediate prospect of the report being adopted, usually, the policy would have said so. Therefore, it seems, though it may be a pure speculative thought, that the immediate prospect of the report being adopted and implemented, is thin.

Abolition of pre-payment penalty on floating rate home loans:
Contrary to practices in international markets, most home loans in India are on a floating rate basis and it is surprising to many that Indian home lenders continued to charge pre-payment penalties on home loans over the years. Pursuant to the Damodaran Committee recommendations, the policy now declares that in case of floating rate loans, there will not be any pre-payment penalties.

This will usher in two things—first, the home loan market will become far more transparent than it is today. Second, banks will also possibly have some temptation to offer fixed rate loans products, and seek to compensate themselves with a pre-payment penalty. Regrettably, the fixed rate loan market has been completely absent in India. There is a separate mention of constitution of a working group for fixed rate products.
Detailed guidelines about pre-payment penalties are to be issued by the RBI shortly.

Basel III implementation:
By end of April 2012, the RBI will come up with a schedule for implementation of Basel III in the country.

It is notable that Basel III makes several significant modifications over the present approach of Basel II. First of all, apart from the stance of Basel II which is on capital adequacy, Basel III introduces liquidity requirements too—both on short run as well as medium run. In addition, Basel III introduces a counter-cyclicity buffer as also redefines Tier 1 capital.

By end-May 2012, the RBI will also publish its guidelines on liquidity risk management by banks, in tune with Basel standards on liquidity risk management.

Measures pertaining to NBFCs:

• New regulatory framework for NBFCs:  Pursuant to the recommendations of the Usha Thorat panel, new set of draft regulations for the NBFC (non-banking financial company) sector are to be published by the RBI end-June 2012.
• Gold loan companies: Gold loan companies have been in the limelight over the recent past, mainly for wrong reasons. It is regrettable that the RBI has allowed this sector to come to a level where it currently is, with some of the companies even tapping the public issue market with huge premiums based on the past performance. Regulatory changes in the recent past surely will not let this performance track record of the past be a proxy for the future.  Recent guidelines limited the LTV (loan-to-value) ratio for these companies to 60%. The present policy makes some significant promulgations for gold loan companies: It sets a limit of exposure of a bank on a single gold loan company to 7.5% of the bank’s capital funds.  In the opinion of the author, this limit will not put curbs on gold loan companies; rather it would only encourage banks to consider lending to these companies. The limit of 7.5% of the bank’s capital funds is quite a huge limit. And this is the limit for one particular bank—therefore; a gold loan company may tie up lines of credit with several banks, and depend on bank funds. If the purpose of the RBI is to tame gold loan companies, the Policy in the present form will only encourage such companies.
• Committee for lending against gold: A new working group has been constituted i) to assess the trends in demand for gold loans and to study how it has influenced gold imports; (ii) to analyse the implication of gold imports for external and financial stability; (iii) to study the trends in gold price and to examine whether NBFCs extending gold loans have any role in influencing the gold price; (iv) to examine the sources of funds of NBFCs for gold loans, especially their borrowings from the banking system; and (v) to examine the current practices of NBFCs involved in lending against the collateral of gold. In short, it seems that the gold loan companies will continue to flourish after the policy.

Securitisation guidelines:
The securitisation guidelines have been on the anvil for almost two years now—in the meantime, two drafts have been issued.

The policy says that by end of April, the guidelines will be finalised. We have already commented on the likely shape of the new guidelines—our comments may be found at Microfinance Focus.

(Vinod Kothari is internationally recognised as an author, trainer and expert on specialised areas in finance, including securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments, microfinance, etc.)