We’ve had 10 large entities in the financial sector going through a ban on business imposed by the banking regulator since 2020. This is perhaps the only thing that links MasterCard, American Express, HDFC Bank, Paytm Payments Bank, IIFL and Edelweiss. Recent actions of the Reserve Bank of India have set the cat among the pigeons within the banking industry and, more importantly, in the investor community interested in the financial services sector.
While there is consensus that regulator action was required and is good for the health of the system, it has triggered a wave of panic and uncertainty among companies in the financial services industry. “I hope we are not next on the list” has become the standard line of many a CXO at social gatherings. In a sense, the fear of regulatory action is good. Travel back to a decade ago, when one never knew what was coming next from the US Food and Drug Administration (USFDA), and this kept every pharmaceutical company with exposure to the US market on its toes.
Observations from the USFDA would typically mean closure of the manufacturing facility until the mistakes were rectified and the authorities were satisfied with the actions taken by the pharma companies. Even if the financial implication of the ban was less than a 10 per cent hit on revenues and profits, it impacted the stock price of the company. What was worse, despite the ban being lifted after six months or a year, it left a cloud of doubt in the minds of investors about the company. It was this element of doubt which stripped Indian pharma stocks of their multi-bagger tag in the bourses, which they held till about 2011–12. Even a decade later, the sector is far from reclaiming the past glory in the stock market.
The RBI’s action on banks and non-banking financial companies (NBFCs) is no different.
There is no denying that prolonged non-compliance of regulations should be reprimanded. But is curbing or shutting down a business the best way to do it? Collectively for the industry, have these regulatory actions improved the functioning of the system? A straightforward answer is difficult. Take the fintech world. Lending practices have streamlined, and curbing prepaid instruments may have averted a credit bubble. Action on card issuers have elevated data protection to an extent. But what about credit cards, gold loans, IPO funding or asset reconstruction companies that have historically worked in a certain way and some of the unacceptable practices still prevail in the system even as the large players are faced with restrictions.
A section of the industry believes that, like the pharma sector which came out stronger and more credible after the USFDA bans, Indian banks and non-banks will also come out robust. But what sets the two industries apart is the need for capital.
Frequent regulatory interventions are pushing foreign investors to stay on the sidelines and watch the space as it evolves. This is also reflecting in the stock…
Read More: Are Indian financial firms going through a USFDA moment?
