The Reserve Bank of India is considering letting banks raise capital through the issue of redeemable preference shares.
Speaking at the FICCI banking summit in Bangalore on Thursday, K J Udeshi, deputy governor RBI, said on Thursday that RBI may facilitate this by amending the legislation that disallows banks from taking this route to raise money. Present regulations also cap the maximum tenure of preference shares.
"This not only gives rise to an uneven playing field but also raises issues pertaining to the eligibility of redeemable preference shares for capital status, especially with regard to inclusion under Tier-I or Tier-II (capital)," Udeshi said.
"Through proper structuring, preference capital may be made attractive to meet the needs of a section of investors," she said.
"We need to explore carefully this option as also the raising of capital through other hybrid instruments defined under the Basel II guidelines so as to address the requirement of capital of the banking sector in India," she said.
She said India should also consider the viability of anti-tying regulations in the financial sector as these issues are interlinked to corporate ethics, disclosures and internal controls.
The concept assumes significance as banks are now offering the gamut of financial services.
In fact, she said, "In some countries there are anti-tying restrictions to prevent banks from forcing customers to take unwanted products to obtain needed services."
She clarified the first step in this direction should be self-regulation. With increasing consumer spending, banks have begun to share their consumer database with product sellers cutting into the consumers' privacy.
While that was one area of concern, she said banks are also diluting their approach to credit risk, thanks to the rise in yields of government securities and the liquidity overhang in the system, leaving them with a poor credit portfolio.
"Credit growth should be calibrated with risk measurement and not be mere funds deployment at marginal cost during times of sluggish growth," she said.
While the appointment of a credit risk officer will check operational and market risks, she said there is also a need for banks to disclose to investors their risk management system policies.
Stepping into the oft debated topic on mergers and acquisitions in the banking sector, she felt the implementation of Basel II norms will trigger a round of consolidation.
However, she clarified that it is not imperative that consolidation will only mean that the larger banks gobble up the smaller ones. Co-existence is indeed possible, if small banks focus on areas such as regional strength and niche sector financing, she said.
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