Banking weekly wrap: Is Mastercard ban a masterful move? Bad bank finally born and more

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RBI's decision to bar Mastercard from onboarding any new customers for being in violation of its local data storage norms could spell trouble for Indian banks, at least in the short term.

Banking weekly wrap: Is Mastercard ban a masterful move? Bad bank finally born and more
The ban on one of the largest card issuers of the country has left the industry in a bit of a fix. Reserve Bank of India's decision to bar Mastercard from onboarding any new customers for being in violation of its local data storage norms could spell trouble for Indian banks, at least in the short term until the space vacated by Mastercard is taken up by the likes of Visa and Rupay. RBL Bank, for instance, said it may lose 8 to 10 weeks before it can start issuing new credit cards as its current tie-up was exclusive with Mastercard. Yes Bank and Bajaj Finserv may similarly face a hit with their credit card business, a profitable segment for banks.
Mukesh Aghi, president and CEO of the US-India Strategic Partnership Forum (USISPF) called it a "sledgehammer" approach by the regulator which is akin to throwing the baby with the bathwater. Aghi warned it may send the wrong signal to global investors who have planned big investments in India. American Express and Diners Club are under a similar ban for non-compliance with the data storage norms.
While a lot has been said on how global investors may not be too pleased with the action taken by RBI, to be fair- these rules were not brought in overnight. The regulator brought in these regulations in April 2018 and gave the system operators six months to ensure all payment data related to their customers in India is stored within the boundaries of India. It has now been over two and a half years, so one could argue that they had ample time to comply, albeit at a high cost.
"Bad Bank" has been all the rage every time the finance community tried to come up with new ideas to solve India’s big bad loan mess. This time, the dusty old idea has actually come to life, well sort of.
The National Asset Reconstruction Company Limited (NARCL) has finally become a legal entity, incorporated with a paid-up capital of Rs 74.6 crore. It proposes to buy over Rs 82,500 crore of bad loans from banks in the first phase, and over Rs 2 lakh crore over a period of time. But before we cheer the proposed clean-up of banks' balance sheets, keep in mind that the process is fraught with challenges, and if China's example is anything to go by, the cheer may not last long.
First, it must not become a crutch for banks to park their problems with. A finite tenure for the bad bank could be considered by the regulator and the government. It should also protect against a fire sale or sale at depressed valuations leading to poor recovery for lenders in the current weak macro-environment. Third, the transfer itself is not the end of the problem. The solution lies in resolution, and the past experience with asset reconstruction companies in India is hardly encouraging. In FY20, the recovery rate under the ARC regime was 36.7 percent. Even after transfer to ARCs, banks continue to hold close to 70 percent of the total security receipts issued by the institutions at the time of selling off assets, RBI data showed.
Experts believe the advantage a National ARC will have over the multitude of existing private ARCs would be its ability to aggregate debt from banks to enable a better resolution and the sovereign's guarantee for security receipts. But a lot has yet to become clear on that front. It's a path India must tread carefully, and learn from the examples of Malaysia, Korea, and others to avoid mistakes of the past.
EXPLAINERS
Explained: How Mastercard, Visa work and make money?

While these two companies don’t extend or issue any cards, they do partner with banks to offer products including credit, debit, and prepaid card options.