In the first week of October, RBI announced changes in many rules related to banking and financial sector. First of all, he made some announcements while presenting the monetary policy on October 1. After that, a proposal was announced to change the rules for companies to raise loans from abroad. Finally, on October 7, the regulator presented draft rules for setting aside capital for different categories of loans.
RBI announced the rules related to financing of acquisition along with the monetary policy. Earlier banks were not allowed to lend money for acquisitions. In 2008, Tata Motors had to raise money from Mauritius to acquire JLR. It was then argued that the lending capacity of banks should be used to expand the capacity of companies in India. Now banks in the country will be able to give loans for acquisition.
The second major decision of the banking regulator is related to risk-based deposit insurance. This will reduce the cost of deposit insurance for big banks. But, the cost may increase for small private banks. In the last five years, RBI has had to step in to douse the fire in LVB, Yes Bank, RBL and even Induside. RBI did not allow any bank to sink. Therefore, due to more insurance, the burden on small banks may increase. In such a situation, RBI will have to come forward to help these banks.
The limit on total banking sector loan to a business group has been removed. This is a welcome step. This limit was set to boost the corporate bond market. Besides, RBI also wanted to reduce the risk for the banking sector. Higher risk weight became necessary when the total bank loans to a business group exceeded Rs 10,000 crore. However, the intention of boosting the corporate bond market was good. Some former RBI executives believe that the limit of Rs 10,000 crore could have been increased to Rs 20,000 crore.
The central bank has removed the limit for loans on debt instruments. This is a welcome step. RBI has reduced the risk-weight on infrastructure loans from NBFCs. This is not right. Infrastructure is a risky business in India. In such a situation, reducing the risk weight is surprising. There is no private funding of infrastructure in India. Most of the government financiers fund it.