RBI looking at business models of banks more closely: Shaktikanta Das

Indian banks will be able to comply with the minimum capital requirements even under severe stress scenarios, according to Reserve Bank of India governor Shaktikanta Das.

The banking regulator has started looking at the business models of banks more closely, the RBI governor says at a conference in Mumbai.

"We have not only prescribed regulatory norms for capital adequacy and liquidity ratios, but even gone beyond to nudge banks to build up capital buffers in good times and times of plenty," Das says, adding that deficiencies in the business model itself can spark a crisis in due course.

Owing to the measures taken by both the Reserve Bank and the banks themselves, the Indian banking system has remained resilient and has not been affected adversely by the recent sparks of financial instability seen in some advanced economies, says Das.

The RBI has strengthened its regulations and supervision of banks and other regulated entities in recent years. "Our approach has been to enhance the resilience as well as the robustness of the financial sector so that individual entities effectively withstand stressful situations," says Das.

The central bank, according to Das, has devoted its efforts to identifying and addressing the 'root causes' of the vulnerabilities. "Many a times, vulnerabilities arise from inappropriate business models adopted by banks and other financial entities. Over-aggressive growth strategies or mindless pursuit of bottom lines, for instance, are often a precursor to future problems. While we do not interfere with business decision making, Regulated Entities must demonstrate adequacy of internal controls and loss absorption capacity to match the risks that their business models may generate," Das says.

"Our approach is to flag deficiencies in this area to the senior management or to the Board of Directors of individual institutions for remedial action. We also remain engaged with external auditors and flag issues that are relevant for their role as the third line of defence," he says.

The banking regulator is now focusing on the adoption of advanced analytical-based technological solutions, including artificial intelligence (AI) and machine learning (ML) for strengthening the internal supervisory processes.

On recent innovations in fintech, Das says the country has seen a proliferation of digital lending by non-banking financial companies (NBFCs), fintechs, and loan apps. Such lending also brought with it certain challenges, especially with regard to fair practices and consumer protection, he says.

To address these challenges, the Reserve Bank laid down guidelines for digital lending in September 2022. "We have to continue monitoring and assessing the implications of these emerging trends, while also developing our own capabilities and frameworks to effectively respond to these challenges," says Das.