RBI to issue guidelines for banks’ entry into private equity business

Addressing a banking conference in Mumbai, jointly organized by the Federation of Indian Chambers of Commerce and Industry and Indian Banks’ Association, the apex bankers’ lobby in the country, the Reserve Bank of India (RBI) deputy governor Usha Throat told that the central bank is thinking of issuing a draft discussion paper on norms for banks’ setting up and operating private equity (PE) funds.

She told that the proposed discussion paper on prudential issues in banks’ floating and managing private pools of capital will help banks in sensing about the risks involved in such activities so that they can limit such exposures adequately with their risk management and available capital.

Thorat said setting regulations for banks who want to enter the PE business will be an addition to several other steps that RBI is planning to strengthen financial regulation in the country.

Several Indian banks, including the country’s largest lender State Bank of India, have set up divisions to enter in this business. Meanwhile SBI (PE) has revealed plans to float a PE firm along with Macquarie group of Australian and International Finance Corp. or IFC, Washington, to float an infrastructure fund. The bank has also attained a 20% stake in PE firm Sage Capital Fund Management.

At present for banks there are no guidelines to regulate the operation of PE funds.

By October RBI will be putting a draft circular detailing modalities for adopting global best practices on liquidity risk management as suggested by the Basel committee in September 2008 on its website. The Basel committee is an international body that prepares accounting norms, especially for banks.

The apex bank will be providing clarification on recommendations on other international best practices to be followed by the banks, Thorat said.

Earlier in July this year, the Basel committee had issued standards for higher capital requirement for trading books and also prescribed a higher capital requirement for securitization and off-balance sheet items such as derivative products. Soon RBI will be issuing guidelines to regulate these recommendations in India, the deputy governor added.

Also additional guidelines on securitization of loans originated and purchased by banks will be issued by the RBI. The main focus of guidelines will be on a minimum lock-in period and minimum retention criteria, she added.

Thorat said that the central bank will be suggesting the sound procedures and principles being developed by the Financial Stability Board for financial institutions related to compensation packages. Earlier in April in its annual policy RBI had given hint about such a move.