👍👍👍Freedom, not licence | The Financial Express

Clipped from: https://www.financialexpress.com/opinion/freedom-not-licence/3064343/

Supervisory reviews have shown that some banking entities use the “operational autonomy” granted by the RBI as a licence to squeeze customers

I actually received a couple of calls from the RBI about the article but there has been zero action on the ground.

It was heartening to read that the Reserve Bank of India has issued “instructions” to banks (and other regulated entities) regarding their current practices on penal interest/charges in case of defaults/non-compliance by the borrower with the terms on which credit facilities were sanctioned. As the RBI notes [emphasis mine], “Penal interest/charges are not meant to be used as a revenue enhancement tool …” but supervisory reviews have shown that some entities use the “operational autonomy” granted by the RBI as license to squeeze customers in this (and other) areas.

The widely accepted approach of principles-based (as opposed to rules-based) regulation adopted by the RBI has always been a double-edged sword. On the one hand, it reduces the regulatory cost to banks and the regulator, and has led to deeper and, it is hoped, fairer markets. On the other hand, many—indeed, I would say, most—customer-facing bankers, oblivious to Gandhiji’s exhortation of “commerce with morality”, recognize that the regulator, while not asleep at the wheel, has been well convinced by several worthies (self included, a couple of decades ago) that banks are responsible institutions.

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The unfortunate truth is they are not—the profit (and bonus) motive overwhelms any old-fashioned notions of morality. As a result, if the regulator isn’t paying close attention or is simply looking the other way, banks’ constituents (or certainly most of them) simply become lambs to the slaughter.

I wrote some months ago about a client that had called us in to advise on a cross-currency swap unwinding that their bankers had advised. Analysing the transaction, we found that the bank had charged a spread—hold your breath—of 45% (of the swap value) during the initiation of the swap. And this was to a large (around $1.5 bn) company. We assisted the client in negotiating the unwinding and brought the bank’s spread on that transaction down to a MERE 9.5%—this on top of the usurious spread they had already collected at initiation!

I actually received a couple of calls from the RBI about the article but there has been zero action on the ground. It would seem from the April 12 circular on fair lending practices quoted earlier that the RBI shares my belief that banks, who have the privilege of being authorised dealers in foreign exchange, should be permitted to charge a fee for their services, but the fees/charges “are not meant to be used as a revenue enhancement tool.” To my mind, the RBI should require that banks explain the pricing on all derivatives, whether at initiation or unwinding, in straightforward Excel format to customers; to keep a check on this, the RBI’s audits should include a detailed picture of all derivative transactions sold to customers by banks.

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But this is not the most egregious licence being taken by banks on being given the freedom to fix customer charges for various activities undertaken on their behalf. The much bigger problem—certainly from the point of view of economic growth—is the FX spreads being charged to small and medium enterprises (SMEs) who have much less wherewithal to either understand the markets or negotiate hard with their bankers. It is quite common even today for small companies to be charged 50 paise or more over interbank for spot export realisations (or import payments)—a more reasonable spread would be in the range of 1 paise or below (for large transactions) and seldom, if ever, more than 5 paise. That this unfair cost adds pressure on the competitiveness of our SME sector is, obviously, not a thought in bankers’ minds—like I said, they take their freedom as licence to do as they please.

Fortunately, the RBI has been acutely aware of this problem for some time and it has constructed a wonderfully elegant solution—CCIL’Ss FX Retail platform, where the interbank rate (plus or minus a clearly articulated bank margin) is available to anyone who needs to buy or sell FX, whether it’s for $20,000 or $2 million. This is yet another technology-driven game-changer from the RBI, except that, in practice, it is again waylaid by banks, who need to introduce their constituents to the platform, fix limits and margins transparently.

The reality is that while the platform has been running for over two years and has several thousand companies enrolled, it is the usual story with a handful of banks each having a few thousand clients on board and, at the other end, several with zero (to a handful of) clients enrolled. To my mind, the RBI should require banks to report on a quarterly basis the percentage of their clients who are using FX Retail and provide a time line over which they increase participation to at least 50%.

I recognise that this may put some pressure on the RBI’s monitoring and audit processes, but if it results in improving the performance of a large number of SMEs by as much as 1%, the gains to the country would be immeasurable.

The author is CEO. Mecklai Financial

http://www.mecklai.com