RBI showing serious commitment to improve governance, transparency in finance firms, banks: S&P

New Delhi: S&P Global Ratings on Tuesday said India's financial system regulator, the Reserve Bank of India (RBI), is showing serious commitment to improving governance and transparency in the sector.

The recent measures by the RBI will curtail lenders' over-exuberance, enhance compliance culture, and safeguard customers, but the drawback will be higher capital costs for institutions.

RBI's measures include restraining IIFL Finance Ltd and JM Financial Products Ltd from disbursing gold loans and loans against shares, respectively, and asking Paytm Payments Bank Ltd (PPBL) to stop onboarding of new customers.

In December 2020, the RBI suspended HDFC Bank from sourcing new credit card customers after repeated technological outages, S&P said.

These actions are a departure from the historically nominal financial penalties imposed for breaches, it added.

"India's regulator has underscored its commitment to strengthening the financial sector," said S&P Global credit analyst Geeta Chugh.

"But the increased regulatory risk could impede growth and raise the cost of capital for financial institutions."

According to S&P, the RBI has diminishing tolerance for non-compliance, customer complaints, data privacy, governance, know-your-customer (KYC), and anti-money laundering issues.

India's financial system regulator, the Reserve Bank of India (RBI), is showing a serious commitment to improving governance and transparency at finance companies and banks, it said.

"Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI's new measures are creating a more robust and transparent financial system," Chugh said.

The RBI has decided to publicly disclose the key issues that lead to suspensions or other strict actions against concerned entities. The central bank has also become more vocal in calling out conduct that it deems detrimental to the interests of customers and investors.

It has cited perfunctory credit underwriting, overvaluation of collateral, and governance issues in select financial sector companies, S&P said.

"We believe that increased transparency will create additional pressure on the entire financial sector to enhance compliance and governance practices," Chugh said.

S&P said some retail loans, such as personal loans, loans against property, and gold loans, may be diverted to invest in stock markets.

It is difficult to ascertain the end-use of money in these products, but market participants believe that the RBI and market regulator Securities and Exchange Board of India (Sebi) want to protect small investors by scrutinising these activities more cautiously.

"We expect the regulatory actions to drive banks and finance companies to better focus on policies and processes, ultimately enhancing the operational resilience of the system."

"However, this shift is likely to lead to increased compliance costs for the sector. This may curb the ability of smaller companies to compete in the market," S&P said.