Hi,

Welcome to the 114th edition of The Pattern, a weekly newsletter where we delve into the latest in the world of finance, technology and economy. Let’s get started.

Moving up the ladder of India’s banking caste system

Hear me out. There’s a social hierarchy in place in India’s financial system and it’s not much different from the social caste system prevalent in the country. The hierarchy is put in place by none other than the regulator itself and at the apex sit commercial banks. They’re followed by smaller banks, regional banks, payment banks and so on. Towards the middle you're going to find shadow banks or Non-Banking Finance Companies – especially of the lending kind.

These companies serve as the fulcrum of credit dissemination in India and find themselves serving at the front lines while also manning the cover fire required in times of extreme chaos. And NBFCs have done a bang-up job of the same!

Except, now they want to be treated like first-class citizens.

For far too long, the hierarchical banking caste system has come with its own set of rules – stringent for those up at the top but also including perks and privileges that reduce as one goes down the ladder.

NBFCs feel like they’ve drawn the short straw for far too long. Recently, an industry body that represents the NBFC sector called for more equal regulations. Among other things, it asked the government and the RBI to remove certain barriers to business growth such as stricter recovery and collection mandates and taxation laws such as TDS mandate.

The idea, the body - Finance Industry Development Council (FIDC) - says, is to “harmonise regulations” so that there’s an equal playing field. The industry also asked for a separate refinancing entity just for NBFCs in the same vein as National Housing Bank finances all housing finance companies.

Over the years, liquidity has been a recurring challenge for NBFCs, especially for many small and medium-sized NBFCs. Sources of funding like public deposits and external commercial borrowings have been restricted. The recent concerns on the over dependence on banks for funding have further added to the liquidity concerns," FIDC director Raman Aggarwal said in the memorandum to the finance minister according to the Economic Times.

These aren’t casual demands – they reflect the larger shift underway in the Indian financial system where the entities that get to play more important roles in the economy naturally ask for more breathing room as they adjust to the newer realities. However, the push and pull between regulations and innovations is unlikely to stop anytime soon and the resulting friction might just push the boundaries – of what one can’t say yet.

PS: Among other things in the NBFC wish list is also one item that’s most important of all – allowing credit lines on UPI rails.

With that, it’s a wrap for this week. More news follows below in the reading list section.

Have a good weekend!

Reading list

1. Kotak Bank bets big on MSME loan uptick

2. RBI flags pursuit of growth at cost of risk buildup

3. Banking 'efficiency': Public sector banks beat private peers in new SBI list

4. Bad loan restructuring emerges to be a better option for ARCs

5. Private banks further consolidate lending market share

Cheers,

Mayank