Corporate houses shouldn’t expect banking licences
In a world where change is said to be the only constant, it’s good to know that some things do not change. The Reserve Bank of India’s (RBI) long-held policy of keeping corporates out of banking, for instance. “There is no proposal to allow corporates, either directly or through non-banking finance companies, to obtain banking licences,” said RBI Governor Sanjay Malhotra last week. He cited an “inherent conflict of interest with a group actually dealing with the money of depositors.”
So there we have it—spelt out in clear terms by none other than the chief of India’s bank licensing authority. Hopefully, this enunciation of RBI’s position will deliver respite from a notable reality ever since the sector was opened to new entrants: incessant lobbying by corporate houses eager to open banks.
Also Read: Well done, RBI, stay firm on bank licences
In 2020, it may be recalled, RBI had released the report of an internal working group tasked with reviewing the extant ownership guidelines for private banks and their corporate structure.
The group’s advice was that large corporate or industrial houses may be allowed to act as bank promoters only after necessary amendments were made to the Banking Regulation Act of 1949 to prevent connected lending in particular and the exposure of such banks to other group entities, financial or non-financial, in general; plus, the sector’s supervisory mechanism had to be strengthened first.
Neither has happened. Although RBI has been tightening supervision, it is nowhere near fool-proof. We have also not seen any movement on another key recommendation of that report: that a ‘non-operative financial holding company’ structure be preferred for all new licences issued for universal banks. Wisely, RBI has maintained the status quo on corporate entry.
Also Read: Banking on trust, losing billions: India’s bank fraud epidemic needs urgent answers
The argument that India’s banking sector is small relative to its GDP in comparison with other countries in its peer group and we must therefore let corporations start banks is not persuasive. Other sources of finance such as equity, corporate bonds and loans from non-bank financial companies have emerged in a big way in recent years.
Moreover, India is not the only country that bars corporations from banking. In the US, for example, commercial enterprises are not allowed to own banks—in line with the principle of keeping banking and commerce apart. The same rationale applies here too.
Also Read: G.N. Bajpai: India’s banking industry needs a complete organizational revamp
While safeguards exist, such as a stipulated cap on the stake of promoters as a percentage of the bank’s paid-up equity capital eligible for voting (26% currently), the reality is that rules designed to prevent concentration of control can be circumvented.
We can never be too careful when it comes to ensuring the safety of public savings and securing people’s trust in the banking system, which serves as the bedrock of a modern economy. And that requires two conditions to be fulfilled: One, ownership should be wide and diversified; and two, there must be no scope for conflicts of interest.
Sure, we could do with more and larger banks. But, as the working group report noted back in 2020, capital has not been a constraint for private banks. With the Indian economy averaging an annual growth rate of 7.2% in the past three years, that position has only changed for the better. Public sector banks are better placed too. State Bank of India’s recent qualified institutional placement aimed to raise ₹25,000 crore but attracted bids of ₹1.12 trillion, 64% of it from foreign investors.
This suggests that our banking sector is doing quite well, thank you, without the entry of corporate houses.
Post Comment