V Leeladhar: The evolution of banking regulation in India - a retrospect
on some aspects
Special address by Mr V Leeladhar, Deputy Governor of the Reserve Bank of India, at the
Bankers' Conference (BANCON) 2007, Mumbai, 26 November 2007.
* * *
It is my pleasure to be here with you this afternoon on the occasion of the Bankers'
Conference, which has become a landmark annual event in the Indian banking industry. I am
indeed grateful to the organisers for their kind invitation, which provided me an opportunity to
share my thoughts on the evolutionary path of the banking regulation in India over the past
several decades. The topic, to my mind, appears particularly relevant today when India has
completed 60 years of its Independence this year. While during the last six decades, the
Indian banking system has indeed come a long way traversing an arduous and tortuous path,
it would perhaps be appropriate to assess in retrospect and take stock of how far we have
come from where we started and what more remains to be achieved. I would, therefore, like
to briefly present a bird's eye view of the salient milestones crossed in the long journey of our
banking system and to take stock of the current status of the industry. I would also like to
take this opportunity to briefly touch upon certain doubts, which somehow seem to have
crept in, about certain aspects of the current regulatory dispensation for the Indian banking
sector.
Institutional evolution of the Indian banking
As most of you would, no doubt, be aware, the indigenous system of banking had existed in
India for many centuries, and catered to the credit needs of the economy of that time. The
famous Kautilya Arthashastra, which is ascribed to be dating back to the 4th century BC,
contains references to creditors and lending. For instance, it says "If anyone became
bankrupt, debts owed to the state had priority over other
creditors". Similarly, there is also a
reference to "Interest on commodities loaned" (PRAYOG PRATYADANAM) to be accounted
as revenue of the state. Thus, it appears that lending activities were not entirely unknown in
the medieval India and the concepts such as "priority of claims of creditors" and "commodity
lending" were established business practices.
During the period of modern history, however, the roots of commercial banking in India can
be traced back to the early eighteenth century when the Bank of Calcutta was established in
June 1806 - which was renamed as Bank of Bengal in January 1809 - mainly to fund
General Wellesley's wars. This was followed by the establishment of the Bank of Madras in
July 1843, as a joint stock company, through the reorganisation and amalgamation of four
banks viz., Madras Bank, Carnatic Bank, Bank of Madras and the Asiatic Bank. This bank
brought about major innovations in banking such as use of joint stock system, conferring of
limited liability on shareholders, acceptance of deposits from the general public, etc. The
Bank of Bombay, the last bank to be set up under the British Raj pursuant to the Charter of
the then British East India Company, was established in 1868, about a decade after the
India's first war of independence. The three Presidency Banks, as these were then known,
were amalgamated in January 1921 to form the Imperial Bank of India, which acquired the
three-fold role: of a commercial bank, of a banker's bank and of a banker to the government.
It is interesting to note here that merger of banks and consolidation in the banking system in
India, is not as recent a phenomenon as is often thought to be, and dates back to at least
1843 - and the process, of course, still continues. With the formation of the Reserve Bank of
India in 1935, some of the central banking functions of the Imperial Bank were taken over by
the RBI and subsequently, the State Bank of India, set up in July 1955, assumed the other
functions of the Imperial Bank and became the successor to the Imperial Bank of India.
Evolution of legislative regulation of banking in India
In the very early phase of commercial banking in India, the regulatory framework was
somewhat diffused and the Presidency Banks were regulated and governed by their Royal
Charter, the East India Company and the Government of India of that time. Though the
Company law was introduced in India way back in 1850, it did not apply to the banking
companies. The banking crisis of 1913, however, had revealed several weaknesses in the
Indian banking system, such as the low proportion of liquid assets of the banks and
connected lending practices, resulting in large-scale bank failures. The recommendations of
the Indian Central Banking Enquiry Committee (1929-31), which looked into the issue of
bank failures, paved the way for a legislation for banking regulation in the country.
Though the RBI, as part of its monetary management mandate, had, from the very
beginning, been vested with the powers, under the RBI Act, 1934, to regulate the volume and
cost of bank credit in the economy through the instruments of general credit control, it was
not until 1949 that a comprehensive enactment, applicable only to the banking sector, came
into existence. Prior to 1949, the banking companies, in common with other companies, were
governed by the Indian Companies Act, 1913, which itself was a comprehensive
reenactment of the earlier company law of 1850. This Act, however, contained a few provisions
specially applicable to banks. There were also a few ad hoc enactments, such as the
Banking Companies (Inspection) Ordinance, 1946, and the Banking Companies (Restriction
of Branches) Act, 1946, covering specific regulatory aspects. In this backdrop, in March
1949, a special legislation, called the Banking Companies Act, 1949, applicable exclusively
to the banking companies, was passed; this Act was renamed as the Banking Regulation Act
from March 1966. The Act vested in the Reserve Bank the responsibility relating to licensing
of banks, branch expansion, liquidity of their assets, management and methods of working,
amalgamation, reconstruction and liquidation. Important changes in several provisions of the
Act were made from time to time, designed to enlarge or amplify the responsibilities of the
RBI or to impart flexibility to the relative provisions, commensurate with the imperatives of the
banking sector developments.
It is interesting to note that till March 1966, the Reserve Bank had practically no role in
relation to the functioning of the urban co-operative banks. However, by the enactment of the
Banking Laws (Application to Co-operative Societies) Act, 1965, certain provisions of the
Banking Regulation Act, regarding the matters relating to banking business, were extended
to the urban co-operative banks also. Thus, for the first time in 1966, the urban co-operative
banks too came within the regulatory purview of the RBI.
Prudential policy framework for banking regulation and supervision
The basic rationale for exercising fairly close regulation and supervision of banking
institutions, all over the world, is premised on the fact that the banks are "special" - for
several reasons. The banks accept uncollateralised public deposits, are part of the payment
and settlement system, enjoy the safety net of deposit insurance funded by the public
money, and are an important channel for monetary policy transmission. Thus, the banks
become a keystone in the edifice of financial stability of the system - which is a "public good"
that the public authorities are committed to provide. Preventing the spread of contagion
through the banking system, therefore, becomes an obvious corollary of regulating the banks
to pre-empt any systemic crisis, which can entail enormous costs for the economy as a
whole. This is particularly so on account of the inevitable linkages that the banks have by
virtue of the nature of their role in the financial system. Ensuring safety and soundness of the
banking system, therefore, becomes a predominant objective of the financial regulators.
While the modalities of exercising regulation and supervision over banks have evolved over
the decades, in tandem with the market and technological developments, the fundamental
objective underlying the exercise has hardly changed. Of course, a well-regulated and
efficient banking sector also enhances the allocative efficiency of the financial system,
thereby facilitating economic growth.
In this backdrop, as the functions of the RBI evolved over the years, the focus of its role as a
regulator and supervisor of the banking system has shifted gradually from micro regulation to
macro prudential supervision. A journey through the major landmarks in the evolution of the
RBI's role vis-à-vis the commercial banks provide interesting insights. Allow me to very
briefly dwell on the salient aspects of this evolutionary process.
As regard the prudential regulatory framework for the banking system, we have come a long
way from the administered interest rate regime to deregulated interest rates, from the system
of Health Codes for an eight-fold judgmental loan classification to the prudential asset
classification based on objective criteria, from the concept of simple statutory minimum
capital and capital-deposit ratio to the risk-sensitive capital adequacy norms - initially under
Basel I framework and now under the Basel II regime. There is much greater focus now on
improving the corporate governance set up through "fit and proper" criteria, on encouraging
integrated risk management systems in the banks and on promoting market discipline
through more transparent disclosure standards. The policy endeavor has all along been to
benchmark our regulatory norms with the international best practices, of course, keeping in
view the domestic imperatives and the country context. The consultative approach of the RBI
in formulating the prudential regulations has been the hallmark of the current regulatory
regime which enables taking account of a wide diversity of views on the issues at hand.
On the supervisory side, we have traversed vast territory in progressively refining our
supervisory focus to ensure a safe and sound banking system, comparable with the best in
the world. Thus, we have continually graduated from the system of on-site Annual Appraisal
of the banks by the RBI followed in the 1970s to the system of Annual Financial Review
during the 1980s, then on to the Annual Financial Inspection of stand-alone banks during the
1990s and further on to the consolidated supervision of financial conglomerates so as to
address the supervisory concerns on a group-wide basis. The off-site monitoring of the
banking system was also introduced in 1995 as a part of the supervisory strategy of ongoing
supervision of the banks, so as to supplement the periodical full-scope on-site bank
examinations. The supervisory rating models (CAMELS and CACS), based on crucial
prudential parameters, were also developed by the RBI to provide a summary view of the
overall health of the banks. The Prompt Corrective Action (PCA) Framework was put in place
to enable timely intervention in case of any incipient stress in a bank. The latest supervisory
initiative has been the introduction of risk-based supervision of the banks so as to move
away from transaction audit and to enable the modulation of the supervisory efforts in tune
with the risk profile of the banks and to achieve optimal deployment of the scarce supervisory
resources. Last but not the least, the Board for Financial Supervision, constituted in 1994
under the Chairmanship of the Governor, RBI has been the guiding force in securing the
transformation in the regulatory and supervisory apparatus of the banking system.
While the multi-dimensional regulatory and supervisory measures are justifiably reflected in
the significantly improved prudential parameters of the Indian banking system, be it the level
of NPAs or the capital adequacy ratios, there is hardly any room for complacence. In the era
of ever-increasing financial globalisation and in the face of rapid financial innovations, all of
us will continually need to remain on a steep learning curve and upgrade our skills and
knowledge to be able to meet the emerging challenges in the financial world.
Some elucidation regarding the regulatory environment
Let me now digress a little to address a somewhat different aspect of our regulatory
environment. The Reserve Bank of India has earned, in the service of our country, a proven
track record of professionalism, which has lent it considerable credibility - both domestically
and globally. This credibility enables the RBI to confidently carry on with the reform process
to be able to maintain price and financial stability, while enabling a self-accelerating equitable
growth at elevated levels. However, as I mentioned earlier, in certain quarters, there seem to
be some misunderstandings, regarding certain dimensions of the extant prudential regulatory
framework of the RBI. I would like to briefly address some of the salient ones and explain as
to how the perceptions and the reality may not often converge.
Branch authorisation policy
As you are aware, the RBI announced a new Branch Authorisation Policy in September 2005
under which certain changes were brought about in the authorisation process adopted by the
RBI for the bank branches in the country. As against the earlier system, where the banks
approached the RBI, piece meal, through out the year for branch authorisation, the revised
system provides for a holistic and streamlined approach for the purpose, by granting a
bankwise, annual aggregated authorisation, in consultation and interaction with each applicant
bank. The objective is to ensure that the banks take an integrated view of their
branchnetwork needs, including branch relocations, mergers, conversions and closures as well as
setting up of the ATMs, over a one-year time horizon, in tune with their own business
strategy, and then approach the RBI for consolidated annual authorisations accordingly.
There seems to be some misunderstanding in some quarters that, under the new policy, the
banks have to wait for the annual authorisation exercise and are constrained in
approaching the RBI for any emergent authorisation in between. Since the branch expansion
planning of the banks is expected to be a well thought out, Board-approved annual process,
normally, there should be no need for any emergent or urgent authorisation being required
by the banks, in the interim. However, I would like to emphasise that the new policy does not
preclude the possibility of any urgent proposals for opening bank branches being considered
by the RBI even outside the annual plan, specially in the rural / under-banked areas, anytime
during the year. This flexibility has been clearly articulated in our policy guidelines as
contained in the Master Circular of July 2007 but somehow, it seems to have got overlooked.
There also seems to be a feeling among some banks that under the new authorisation policy,
the process adopted is more cumbersome and, as a result, there have been delays in issuing
authorisations. Since the banks are required to approach the RBI only after obtaining the
approval of their respective Boards for their annual branch expansion plan, it is possible that
the preparatory time required for filing their annual plan with the RBI might be a little longer.
The processing time at the end of the RBI, however, has been generally in the range of one
to two months - which I consider to be reasonable, given the element of consultation with the
banks built into the process. However, the actual number of authorisations issued by the RBI
under the new policy has been much higher than before. For instance, as against the a total
of 881, 1125 and 1259 authorisations given by the RBI under the old policy regime during
2003-04, 2004-05 and 2005-06, respectively, the number of authorisations issued under the
new policy during 2006-07 was 2028. Thus, as against the general perception that the new
policy has been more restrictive in granting authorisations, the fact is that there has been a
sharp increase of about 61 per cent in the total number of authorisations granted last year.
I am afraid, however, that similar improvements can not be said about the performance of the
banks in utilising the authorisations received. Even though the banks were granted
authorisations to the extent of 97 per cent and 62 per cent of the authorisations sought by
them for the years 2004-05 (April-March) and 2005-06, respectively, as at end-March 2007,
as much as 30 per cent and 38 per cent of the authorisations granted for those years had still
not been utilised, even after more than a year or two of grant of the authorisations. As on that
date, the extent of non-utilisation for the year 2006-07 was much higher at 61 per cent when
only 69 per cent of the authorisations sought had been granted. Though I presume that many
more licences would have been utilised since March 2007, I would, nonetheless, like to urge
the banks present here to ensure expeditious and fullest utilisation of the authorisations
granted.
You would recall that under the old authorisation policy, the banks were free to install off-site
ATMs, at the places of their choice, without the prior approval of the RBI but only needed a
licence from the concerned Regional Office of the RBI before operationalising the ATM, so
as to ensure compliance with the provisions of Section 23 of the B R Act. Under the revised
authorisation policy, however, the banks are required to obtain prior approval of the RBI even
for the off-site ATMs. Some, therefore, expressed a view that the requirement of prior
authorisation of the ATMs in the new policy is not quite justified, as an ATM is not a
fullfledged place of business for the banks. Let me hasten to mention here the RBI has been
liberal in authorising setting up of the ATMs and all the requests received by the RBI for
establishing as many as 7443 ATMs were fully acceded to for the year 2006-07.
As we know, the ATMs, in the format they are used today in India, already provide for deposit
and withdrawal of cash, balance enquiry, account statements, etc. However, as seen in
some of the advanced countries, the technology permits and can be leveraged to deploy the
ATMs for delivering a much wider variety of banking services to the banks' customers and
thus, have the potential of becoming a much fuller place of banking business. In any case,
since the ATMs constitute an important channel for delivery of banking services, it is only
logical that the network planning of the banks also captures the plan for setting up their
ATMs and reflects it in their annual plan furnished to the RBI for authorisation. Besides, in
India's WTO commitments in regard to banking services, the Market Access limitations
provide for specific licensing of the ATMs of the foreign banks, though the ATM licences are
not counted within the ceiling of 12 licences per year, as committed by India. In the emerging
global context, therefore, it is only appropriate that the ATMs continue to be kept within the
purview of regulatory authorisation policy.
Operations of foreign banks in India
At present, there are 29 foreign banks operating in India with a network of 273 branches and
871 off-site ATMs. Among some circles, a doubt is sometimes expressed as to whether the
regulatory environment in India is liberal in regard to the functioning of the foreign banks and
whether the regulatory approach towards foreign participation in the Indian banking system is
consistent with liberalized environment. Undoubtedly, the facts indicate that regulatory
regime followed by the Reserve Bank in respect of foreign banks is non-discriminatory, and
is, in fact, very liberal by global standards. Here are a few facts which bear out the
contention;
•
India issues a single class of banking licence to foreign banks and does not require
them to graduate from a lower to a higher category of banking licence over a
number of years, as is the practice followed in certain other jurisdictions.
•
This single class of licence places them virtually on the same footing as an Indian
bank and does not place any restrictions on the scope of their operations. Thus, a
foreign bank can undertake, from the very first day of its operations, any or all of the
activities permitted to an Indian bank and all foreign banks can carry on both retail
as well as wholesale banking business. This is in contrast with practices in many
other countries.
•
No restrictions have been placed on establishment of non-banking financial
subsidiaries in India by the foreign banks or of their group companies.
•
Deposit insurance cover is uniformly available to all foreign banks at a
nondiscriminatory rate of premium. In many other countries there is a discriminatory
regime.
•
The prudential norms applicable to the foreign banks for capital adequacy, income
recognition and asset classification, etc., are, by and large, the same as for the
Indian banks. Other prudential norms such as those for the exposure limits,
investment valuation, etc., are the same as those applicable to the Indian banks.
•
Unlike some of the countries where overall exposure limits have been placed on the
foreign-country related business, India has not placed any restriction on the kind of
business that can be routed through the branches of foreign banks. This has been
advantageous to the foreign bank branches as the entire home-country business is
generally routed through these branches. Substantial FII business is also handled
exclusively by the foreign banks.
•
In fact, some Indian banks contend that certain amount of positive discrimination
exists in favour of foreign banks by way of lower Priority Sector lending requirement
at 32 per cent of the adjusted net bank credit as against a level of 40 per cent
required for the Indian banks. Unlike in the case of Indian banks, the sub-ceiling in
respect of agricultural advances is also not applicable to foreign banks whereas
export credit granted by the foreign banks can be reckoned towards priority sector
lending obligation, which is not permitted for the Indian banks.
•
Notably, in terms of our WTO commitment, licences for new foreign banks may be
denied when the share of foreign banks' assets in India, including both on- as well
as off-balance-sheet items, in the total assets (including both on- and
off-balancesheet items) of the banking system exceeds 15 per cent. However, we have
autonomously not invoked this limitation so far to deny licences to the new foreign
banks even though the actual share of foreign banks in the total assets of the
banking system, including both on- and off-balance-sheet items (on Notional
Principal basis), has been far above the limit. This share of foreign banks stood at
49 per cent, as at end-January 2007, as mentioned in the India's Trade Policy
Review, 2007.
It is thus very obvious that the Indian regulatory regime is essentially non-discriminatory as
between branches of foreign banks and domestic banks, in regard to their authorisation or
the scope of their operations, though some hold that there is some positive discrimination in
favour of the foreign banks. As explained, Indian regulatory regime is in fact much more
equitable and provides a far more level playing field to the foreign banks, than in many other
jurisdictions both developed and emerging economies.
As regards the market share of the foreign banks in the Indian commercial banking system,
the share, as at end-June 2007, in the deposits and advances stood at 6.11 and 6.83 per
cent, respectively. However, the foreign banks were far more dominant in the off-balance
sheet business with a market share of as high as 72.66 per cent. Besides the foreign banks,
there are also two large Indian private sector banks in which the non-resident ownership is
very close to 74 per cent permitted, which could, therefore, be considered as incorporated in
India but predominantly foreign owned banks. These banks together with the foreign banks,
have a combined market share in the country in the deposits, advances and
off-balancesheet business of 17.46, 18.65 and 76.63 per cent, respectively, which, by no means, are
insignificant levels. Moreover, there are also about 10 large listed public sector banks in
which the non-resident / FII shareholding was close to the permitted ceiling of 20 per cent, as
at March-end 2007. In these public sector banks, resident private shareholding would thus be
close to thirty per cent only.
Furthermore, the share of the foreign banks in the foreign exchange market in India was also
significant and had registered a rising trend. For instance, as against their share of 41 per
cent in the total foreign exchange turnover during 2005-06, their share during the first half of
2007-08 stood at 52 per cent.
Thus, viewed in totality, it would be extremely difficult to justify the notion that the foreign and
non-resident participation in the Indian banking markets is insignificant or restricted and that
the policy or regulatory environment is not conducive to it.
Another dimension of the foreign banks' functioning in India is the from
returns generated
their Indian operations. Let me mention a few interesting facts here. The net profit per branch
for the foreign banks in India for the year 2005-06 was Rs. 11.99 crore as against the
corresponding figure of Rs. 0.33 crore for the public sector banks (PSBs). Further, for the
year 2006-07, the Return on Assets (ROA) of the foreign banks was 1.65 per cent while the
Return on Equity (ROE) was 14.02 per cent, as against the corresponding figures of 0.82 per
cent and 13.62 per cent for the PSBs. These returns need to be viewed in the context of the
international benchmarks for these parameters, which are generally considerably lower.
Thus, the Indian operations of the foreign banks are very remunerative and the returns are
notably higher than that of their domestic counterparts as also the customary international
levels. While this could be attributed, to an extent, to the level of domestic market
development and lack of contestability in the Indian markets, this is also, in no small
measure, on account their business mix and a dominant share in the off-balance business,
which is more regulatory-capital efficient, and the pattern of their branch presence, which is
so far largely confined to the major cities of the country.
Yet another aspect of the foreign banks' operations is the authorisation of their branches
in India. As you might be aware, as per India's existing WTO commitments, which came into
effect from 1997-98, our obligation is to permit to foreign banks only 12 licences per year,
including both - the new entrants and the existing banks. As per the commitment made by
India, this obligation of 12 licences does not include the ATMs that might be permitted by the
RBI. RBI has, however, consistently been granting authorisations at levels higher than our
obligation, not counting the numbers of ATMs set up by the foreign banks. Thus, during the
period 2003 to October 2007, RBI had authorised as many as 75 branches of the foreign
banks in India, excluding the off-site ATMs set up by them. Thus, branch authorisation policy
for the foreign banks in India may even be described as quite generous, and not merely
liberal.
Notwithstanding the WTO obligations, permitting foreign banks' presence in a country is in
some senses also guided by the extent of reciprocity amongst the nations - which simply
means that there should be some defensible proportionality in the authorisations granted for
the banks of each other's countries. In this context, an illustration would be revealing of the
ground realities. During the period 2003 to October 2007, India had granted 19
authorisations to the USA-based banks, most of which also stand utilised. However, during
the same period of five years, USA did not authorise any office of the Indian banks in the US
territory, vis-à-vis the requests from the Indian banks for setting up three branches, two
subsidiaries and nine representative offices. Some of the requests have been pending with
the US authorities for more than five years.
Yet another aspect of the foreign participation in the Indian financial sector is the
foreign
ownership of the non-banking finance companies (NBFCs) operating in India, quite a few
of which are the subsidiaries of the foreign banks. It is interesting to note that, as of August
2007, in the category non-deposit-taking systemically important (ND-SI) NBFCs, the NBFCs
with some element of foreign ownership had an asset base of Rs. 87,542 crore and
accounted for more than 26 per cent of the total assets of this class of NBFCs. Of these, the
NBFCs with majority foreign ownership had an asset base of Rs.34,095 crore accounting for
9.2 per cent of the total assets of this class of companies - a level which could not be
considered to be insignificant. The ND-SI NBFCs, which are not closely regulated by the RBI,
therefore, provide, in certain ways, a means of expanding the reach of the foreign banks in
India. Thus, the current policy environment enables a fair level of foreign participation even in
the non-banking financial sector of the country.
Securitisation guidelines of the RBI
As you are well aware, the RBI had first issued the draft guidelines for securitisation of
standard assets in April 2005, for public comments and after an extensive consultative
process, the final guidelines were issued in February 2006, in order to facilitate an orderly
development of this market. In certain quarters, however, a view has been expressed that
these guidelines, tend to negate the benefits envisaged in the very concept of securitisation,
and thus, are hindering the growth of securitisation market in the country. Let me attempt to
briefly present today the international perspective vis-à-vis RBI guidelines and the thinking
and rationale underlying our formulation.
RBI's guidelines are broadly in tune with the stipulations of several regulators in other
jurisdictions. For instance, concept of "true sale" and the independence of the Special
Purpose Vehicle (SPV) from the originator of the assets, prescribed in our guidelines is also
embedded, in one form or the other, in the regulatory guidelines obtaining in Australia,
Malaysia, Singapore, the UK and the USA. Similarly, the prudential treatment of the credit
enhancement provided to the SPVs and the requirement of capital charge thereagainst, as
prescribed in our guidelines, is also echoed in the regulatory framework in Australia, the
United Kingdom and Singapore. Likewise, the provisions relating to the "Clean up Calls", or
repurchase of the residual performing assets from the SPV by the originator, also figure in
the regulations in Australia, the United Kingdom and Singapore. The restrictions placed by us
on purchase of securities issued by the SPV by the originator are also found in other
jurisdictions such as Australia, Singapore and the UK. Similarly, the restrictions in regard to
the provision of liquidity facility to the SPV, underwriting of the securities issued by the SPV
and the servicing of the securitised assets are also found in several other jurisdictions, with
variations in details and in the degree of stringency. I am citing all this at some length to point
out that RBI's guidelines on securitisation are broadly in line with the practices obtaining in
several other jurisdictions, though they have some unique features.
The accounting treatment prescribed in our guidelines provides for upfront recognition of any
loss incurred on sale of assets to the SPV but the profit arising from such sale is required to
be amortised over the life of the securities issued / to be issued by the SPV. Thus, we have
not permitted the banks to recognise the profit upfront, on sale of assets to the SPVs. As you
are aware, the main considerations for the originator in undertaking a securitisation
transaction are obtaining the regulatory-capital relief and generating liquidity from an
otherwise illiquid loan book, and not the profit, per se. In this background, RBI's guidelines
have justifiably adopted such an approach in order to ensure that profit-booking does not
become the primary motive for undertaking securitisation transactions - which could perhaps
lead to profit smoothening, possibly through inappropriate valuations, and the consequent
window dressing of the financial statements - none of which is prudentially desirable. In brief,
the restrictions in our guidelines on upfront recognition of profit on sale of assets by the
banks seek to create the right incentive