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A parallel agenda for the RBI

R Jagannathan

Any regulatory body must learn to operate at two levels. At one level, it must be a policeman, ensuring that people operate within the four corners of the law. At another, it needs to operate like a spy, with one ear to the ground and its nose in the air.

While the ear placed on the ground will tell you what's happening around you, the nose in the air allows you to sniff for potential problems before they emerge.

When it comes to the RBI, I am not sure it fares too well in the latter skill - of sniffing out trouble before it happens. While it is very good at bolting the door and cleaning up the mess after a crisis erupts, it has not demonstrated any great ability to head it off.

The cooperative bank scams, the recent securities scandal, and the Ketan Parekh share scare are pointers to this.

To be a proactive regulator, the RBI needs much better intelligence - in both the senses of the term. It needs more spies (auditors, among others) on the ground, so that it can obtain early warnings on potential problem areas.

And it also needs people who can assess this intelligence in the context on what is happening in front of its eyes. Caught in its own minutiae of micro-regulation and detailed guideline, the RBI often misses the wood for trees.

This is not to say that the RBI doesn't know what's happening in the financial sector. But things are changing so fast that there is a real danger that when the next scam strikes the financial world, the RBI will be caught napping. Again. Here's a small sampler to illustrate this point:

* Housing loans: To grow assets, banks are chasing house buyers with cheap loans. Good for the borrower. But let's look at the risks. Banks blithely assume that these assets are less vulnerable to impairment because borrowers have, in the past, demonstrated no tendency to default. But what's true for the past may not be true for the future.

In the past, when HDFC was by and large the only lender, it could choose to focus on the best borrowers. Moreover, ability to repay is also changing. Five years back, job security in the middle class was fairly certain. Today, most jobs cannot be guaranteed for life. So ability to pay cannot be assumed to be self-evident from salary slips.

Since banks are now landing up on your door-step cheque-books in hand, it is more than likely that NPAs in retail home loans will start moving up. It is time for the RBI to cock an attentive ear to what is happening.

* Banking mafia: To speed up customer acquisition, banks - especially foreign and new-generation private banks - are now effectively outsourcing customer-acquisition activities. They use direct selling agents.

When I want a loan, I part with sensitive documents on my income and wealth to someone who is not accountable to anyone after the transaction is done.

At another level, banks are already using thugs and unsavoury characters for loan recoveries and credit card dues. Now put two and two together. Sensitive customer data is being captured outside the banking system even as the banking system is itself linking up with thugs.

How much time will it take for one unscrupulous DSA to start linking up directly with loan sharks and the mafia for a mutually profitable relationship? The RBI clearly needs to regulate the DSA's much more than it is already doing now.

* Branch licensing: Last year (upto June 2001), commercial banks added 326 new branches. This is pointless. In the context of technological developments, India is heavily overbanked, not underbanked.

There's a branch for every 15,000 people. If half of them are non-earners, the customer potential halves. With ATMs, phone banking and the Internet, today it is possible for a bank to be truly national even with 300-500 branches.

Nobody needs them in thousands. To prevent further sickness in branches, the RBI clearly needs to halt further branch licensing and instead facilitate licence transfers - maybe for a price.

* Weak links: Overall, what's clearly visible to the naked eye is that some banks are growing stronger and stronger while others are growing weaker and weaker. In the first category are the new-generation private banks, the foreign banks and a few big nationalised banks like SBI, BoB and PNB.

The rest are lambs for slaughter. The time to ask these banks to merge or downsize is now - not after they are in deep trouble, threaten the system and seek emergency capital from the government. The RBI should be pushing this agenda now with the government.

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