Banking Regulations Must Be Eased To Improve Liquidity, Says HDFC Bank Ex-CEO

The regulations governing India's banking sector must be eased to improve liquidity in the domestic economy, according to Aditya Puri, former managing director and chief executive officer of HDFC Bank.

The existing regulations, aimed at more efficient cash management, have resulted in reduced availability of liquidity in the banking system as the surplus remains parked with the Reserve Bank of India, Puri wrote in a newspaper.

Globally, he said, only liquidity coverage ratios are mandated for lenders by the regulators to ensure that they meet short-term obligations. However, in India, banks are subjected to statutory liquidity ratios as well. "But do we need both LCR and SLR? Globally, only LCR exists," he wrote in The Indian Express.

Puri also suggested that the requirement of 60% priority sector lending needs to be reviewed. The PSL pricing should reflect credit risk and not pressures to meet the target, he said.

There is also a need to "examine the move to cash-flow-based lending and risk-based pricing," the veteran banker wrote, adding that if not done, it may lead to the exclusion of major sections of the population from organised finance.

Puri also flagged concern over the consequences of the measures taken to maintain the rupee's strength amid a surging dollar. This can overvalue the rupee while causing a reduction in liquidity, he said.

The former HDFC Bank chief also called for the examination of credit-to-deposit ratio calculation, while noting that lenders need to generate returns for investors from whom funds are raised for growth. As such, they should be permitted to "price for risk and processing costs," he added.

The case for easing regulations is also supported by the current positioning of India's government bond market, Puri said. "...despite the inclusion in global indices, our share is at 3% compared to Indonesia’s 14.5%."

Puri's call for relaxing banking regulations comes days after the RBI announced various measures to boost liquidity in the banking system.

These measures, which include a Rs 60,000-crore bond purchase, longer-tenure variable-rate repo auctions and interventions in the foreign exchange market, will likely infuse about Rs 1.5 lakh crore of liquidity into the banking system.

The RBI will conclude its monetary policy committee meeting on Friday. The outcome of the MPC meeting, along with Governor Sanjay Malhotra's statement, would be keenly tracked for further cues on the central bank's stance on the monetary policy, as well as the banking sector.