Banking unshackled, in a break from the past

India's central bank is overhauling a host of financial sector rules that include giving banks more leeway in lending for capital market activities and to large companies, in a bid to supercharge growth in the world's fifth-largest economy.

Are the decisions an overdue reset of restrictive financial regulation, or will they encourage unnecessary risk-taking? That's our focus this week.

And, Bollywood celebrities are taking on AI-generated social media content. Scroll down for more on that. 

Reserve Bank of India governor Sanjay Malhotra, in his job for less than a year, is breaking from the central bank's traditionally cautious approach and allowing banks more flexibility in lending, and corporates greater freedom to borrow.

Announced alongside a monetary policy review last week, the changes come after a decade of policies aimed at lowering risk in the financial sector after a bruising phase which saw bad loans rise to over a tenth of total assets. Stress in the banking sector peaked in 2018 and a clean-up since has brought down bad loans to a decade-low.

Malhotra's announcement, which made some of the changes effective straight away, suggests the central bank is convinced banks are ready to step up risk-taking.

He has junked rules that required banks to set aside more capital for lending to large corporations, permitted them to lend for acquisitions and increased the amount they can offer for IPO subscriptions, while also giving firms greater flexibility to borrow overseas.

"The recent regulatory changes are designed to enhance operational flexibility for banks and stimulate credit growth," said Sachin Sachdeva, financial sector head at rating agency ICRA.

Loan growth for Indian banks has been subdued over the past year, at under 10% so far this financial year. Loans to industry have grown an even slower 5% to 6% and the share of these loans in the banking portfolio has dropped over time.

The decision to allow Indian banks to lend for acquisitions, a segment so far dominated by foreign lenders and credit funds, came after lobbying by India's top lender State Bank of India (SBI).

"This has the potential to open the doors to an industry which market sources value at around $40 billion annually," said Madan Sabnavis, chief economist at Mumbai-based Bank of Baroda.

 The market's response to RBI's moves has been significant, with the Nifty Private Bank index gaining 3.9% since the announcements were made on Wednesday, compared to a 1.9% gain in the benchmark Nifty 50.

Still, the relaxation on acquisition funding is "fraught with risks" of "asset-liability mismatches" for banks, said Vivek Iyer, partner and financial services risk leader, Grant Thornton Bharat.

"A prudent approach would be to specify certain long-term funding sources that would be matched for the purpose of acquisition funding," he said.

Banks are also being allowed to lend more against equity shares, a business previously seen as risky due to swings in the stock market. The amount individuals can borrow to subscribe to IPOs has been raised, at a time when that market is already seeing a frenzy of retail investments.

Malhotra, who has announced several growth-supportive measures since he took over in December, made another departure from past central bank thinking when he announced easier rules for external commercial borrowings (ECB) by corporates.

Companies will be able to borrow more overseas at market rates, compared to a previous framework which did not allow borrowings above a certain cost as a way to keep low-rated firms from taking on large foreign currency exposures.

A cap on the amount that can be borrowed has also been raised and linked to a firm's financials.

"We expect that further liberalisation will increase the ease of access to ECBs for corporates, and help banks grow their forex business," said Soumya Kanti Ghosh, chief economist at SBI.

The earlier cautious approach to foreign borrowings was driven by a view that large foreign liabilities could pressure the central bank into managing the rupee more actively and weigh on forex reserves.

But India's external resilience has improved substantially.

Its foreign exchange reserves have more than doubled over the past decade to $700 billion. Foreign currency reserves as a ratio to external debt - a key metric to judge external resilience - was close to 90% as of March, much improved from 68% a decade ago.

Will the RBI's moves boost growth in the economy but also add to risk in the banking sector? Write to me at ira.dugal@thomsonreuters.com.

Foreign investors sold more Indian equities in September, taking the net sales so far this year to $17.6 billion. This is the second-highest on record for the January–September period.

IT stocks have seen the heaviest selling by foreign portfolio investors this year at $7.2 billion, followed by power, consumer and financials.

Read here for more on the foreign exodus from Indian shares.

Bollywood stars Abhishek Bachchan and Aishwarya Rai Bachchan are asking Indian courts to protect their voice and persona in the era of artificial intelligence.

Hundreds of AI-generated Bollywood videos with 16 million views were deleted from Google's YouTube after the Reuters report.

Floods and landslides unleashed by unrelenting rain in India's eastern hill region of Darjeeling and neighbouring Nepal killed more than 70 people after washing away homes, roads and bridges.

India has seen excess rains in many parts of the country this year, leading to loss of property and livelihoods.

To counter growing risks from climate-change, India is considering introducing a nation-wide climate linked insurance scheme, Reuters reported exclusively.

This newsletter was edited by Muralikumar Anantharaman, Editor, Global News Desk, in Singapore.

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