Independent Research and Policy Advocacy

The Risk Aggregator Model in Banking for India

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India has relied on banks to drive its financial inclusion efforts. However, the high levels of NPAs in banks’ balance sheets has forced them to cut back on lending, adversely affecting the financial inclusion agenda. This has led to calls for reducing regulatory restrictions to enable greater lending. However, there are concerns about financial stability in doing so. Alternative solutions such as narrow banking, while addressing concerns about financial stability, could substantially curtail credit to the real economy. Striking a balance between zero permissions to lend (like the payments banks) and full permissions to undertake completely discretionary lending (like loan companies), this paper presents a stylised version of a bank called the Risk Aggregator Bank (RAB). The RAB, on its assets side, invests or purchases loans and debt securities instead of originating them directly, while resembling a conventional scheduled commercial bank on the liabilities side. The paper elaborates on this stylised version of a bank and on the need for such entities in India in the context of achieving the twin objectives of financial inclusion and financial depth. We explore the various regulatory, institutional capacity level and infrastructural hurdles that hinder the natural evolution of such institutions in India. Particularly, we analyse the impact of Ind AS on the loan markets and the markets for securitised paper, the reforms required in credit rating agency regulations, the infrastructural bottlenecks hindering effective risk management, and the usefulness of Simple, Transparent and Standardised (STS) securitisation framework for the Indian context. The paper also discusses possible solutions to overcome these hurdles in order to enable the development of banking entities that undertake significant risk aggregation as a matter of strategy.

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