{"id":304508,"date":"2024-07-15T20:58:30","date_gmt":"2024-07-15T15:28:30","guid":{"rendered":"https:\/\/forumias.com\/blog\/?p=304508"},"modified":"2024-07-15T20:58:30","modified_gmt":"2024-07-15T15:28:30","slug":"need-for-regulatory-balance","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/need-for-regulatory-balance\/","title":{"rendered":"Need for Regulatory Balance"},"content":{"rendered":"

Source<\/strong>-This post on Need for Regulatory Balance has been created based on the article \u201cMaintaining regulatory balance\u201d<\/strong> published in \u201cBusiness Standards\u201d<\/strong> on 15 July 2024.<\/p>\n

UPSC Syllabus <\/strong>– GS Paper 3 – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment<\/p>\n

Context<\/strong>– The article stresses the need for balanced bank regulation to protect both depositors and investors. While regulators are often conservative and risk-averse, banks need operational flexibility to compete and innovate.<\/p>\n

Why is there a need for a differentiated regulatory framework for banks?<\/strong><\/h2>\n

Banks operate with high leverage ratios, accept public deposits, and rely on central bank support as lenders of last resort. This necessitates a specialized regulatory framework to ensure stability and trust in the banking system.<\/p>\n

What are the challenges in regulation of banks?<\/strong><\/h2>\n

1) RBI’s Control Over Private-Sector Banks – <\/strong>The RBI strictly regulates private-sector banks by approving board appointments, tenures, and salaries, often rejecting candidates or changing recommendations<\/p>\n

2) Credibility Crisis <\/strong>– Seven of the top 10 private-sector banks by market capitalization have chairpersons who are former RBI officials or civil servants. This creates a board structure like public-sector banks. Such close ties can lead to moral hazard, making it difficult for regulators to maintain independence in challenging situations. This process may even risk the credibility of banks.<\/p>\n

3) Lack of Concern for Investors Interest-<\/strong><\/p>\n

A) Many listed banks do not provide complete or timely disclosures, leaving investors uninformed about their true situation.<\/p>\n

B) If the regulator acts suddenly against a bank, investors may be left confused. The RBI often doesn’t provide clear explanations, making it hard for investors to understand what\u2019s happening.<\/p>\n

C) The \u20b98,400 crore litigation over AT-1 bonds issued by YES Bank, written off by the RBI’s administrator, exposes problems with the bond structure that prioritize equity over debt holders. This goes against standard financial principles.<\/p>\n

Read More-<\/strong> RBI Surplus Transfer to Government<\/a><\/p>\n

What should be the way forward?<\/strong><\/h2>\n

1) The RBI should reconsider its appointment policy and limit its role to appointing chairpersons and directors only for systemically important banks.<\/p>\n

2) RBI should improve transparency in its regulatory actions to better serve all stakeholders in the banking sector.<\/p>\n

3) AT-1 bonds should be restructured so that they are written down only after wiping out common equity Tier-I capital.<\/p>\n

Question for practice<\/strong><\/p>\n

What are the challenges in regulation of banks?<\/p>\n","protected":false},"excerpt":{"rendered":"

Source-This post on Need for Regulatory Balance has been created based on the article \u201cMaintaining regulatory balance\u201d published in \u201cBusiness Standards\u201d on 15 July 2024. UPSC Syllabus – GS Paper 3 – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment Context– The article stresses the need for balanced bank… Continue reading Need for Regulatory Balance<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,167],"tags":[10503,216,8184],"class_list":["post-304508","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-economy-subject","tag-business-standard","tag-gs-paper-3","tag-indian-economy","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/304508","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=304508"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/304508\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=304508"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=304508"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=304508"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}