Recent RBI actions will prompt banks and NBFCs to enhance compliance: Fitch Ratings

He also observes that most of these actions in some way or the other essentially cover retail products. So, banks and non-banking finance companies need to be more vigilant on operational and process-related risks.

A: RBI has been pretty active, but before I get to that question, I just like to put it out here that we do not cover JM Financial from a credit perspective, but we do take a keen interest in the regulatory framework whenever we are assessing financial institutions. And what we have generally seen is that a strong and effective regulatory framework is a long-term positive for the financial sector and the financial entities, one from an investor confidence point of view, of course, and the second is in terms of their ability to generate business and profits in a sustainable and risk control manner. So, in that context to your first question, yes, we have indeed seen RBI getting a little more active in a public way, but that is not necessarily in what we are seeing in 2024. If we sort of jog our memory, a little back, and that is not too far back, I mean, we have seen RBI enforce actions on HDFC Bank, we have seen it do so for Bank of Baroda, of course, in recent times, other than JM Financials, we have Paytm and IIFL. And I think what this indicates to us is a regulator that means business and it is not shy of calling out issues wherever they see supervisory concerns. But more importantly, what is also important to recognise is that they are targeting specific business segments; of course, Paytm is an exception, but other than Paytm and whatever actions we have seen, what they have essentially tried to do is to contain systemic risk within a certain business segment, where from their standpoint they have seen supervisory concerns.

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A: As far as fines are concerned, that is pretty much part and parcel of this business. So, in certain situations RBI chooses to go with fines, and we have seen not just any specific institution, but typically institutions depending on where discrepancies arise, RBI does sort of tend to penalise them through fines. But the ones that I am mentioning, they took specific actions where they barred these institutions from either taking on more customers or issuing credit cards, and so on and so forth. And in those specific segments, or perhaps where RBI actually came across some serious issues and in which they have not been shy of putting it out there in public. But I think more importantly the process of regulatory audits have been there in the system for as long as I can remember, but what has changed is that that RBI is now more open to come out and take these stricter actions instead of a more internal dialogue, which perhaps may have been the case in the past. And I think that is ultimately good for the system because one, it adds weight to the old supervisory framework and the strength of the supervisory framework, but also it will keep the entities on their feet in terms of ensuring that whatever business they do, they do it within the confines of the regulatory framework.

A: As a financial sector regulator, it's important to recognise that one of the objectives of the RBI also is to ensure that systemic risks are contained. And, while I would not like to conjecture on whether RBI thinks of this as a much bigger, larger systemic issue, but at the same time, the fact that it is sort of targeting specific product lines, and specific entities. I don't think it is necessarily being kind to isolated cases and perhaps also send a strong message in the process to the other entities so that they can course correct if at all there are any discrepancies at their end. But what perhaps to me, as a credit analyst, tells is that is the high degree of operational risk that typically entails retail business in India because if you see, most of these actions in some way or the other essentially cover retail products. So, for us, banks and NBFCs would probably have to be a lot more vigilant when it comes to operational/process related risks.

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A: RBI does regulatory audits, across companies, I don't think it's necessarily a case where one entity is being subjected to something extra as opposed to the others. So, I don't want to necessarily speculate on what IIFL had said, but our sense is that and based on the companies that we cover, our sense is that those companies so far have largely been in line with whatever the regulatory norms are. And the reason why perhaps a company like IIFL was sort of singled out is, I think those reasons have been laid out clearly on the RBI website. So, of course, management is within its right to defend its position. But to say that RBI is not taking an easy hand on others vis-a-vis someone else, I don't think that would be the right conclusion.

Watch the interview in the accompanying video