Let business houses with good track records run banks
PremiumAllowing them to apply for bank licences and bid for PSBs would work in favour of all stakeholders
The recent revised regulatory guidelines allowing 26% long-term promoter ownership in private banks, as recommended by an internal working group (IWG) of the Reserve Bank of India (RBI), were along expected lines. Previously, some non-industrial-house promoters held stakes beyond 15%. Such harmonization is welcome.
Interestingly, RBI is still examining certain IWG recommendations, including letting corporate industrial houses with or without existing non-banking financial companies (NBFCs) run banks. With the precedence of bank licences being granted to industrial groups, this is not an entirely untrodden path. Besides, if non-industrial groups with marginal political clout—whose financial businesses including capital-guzzling insurance and asset management exceed 60% of total assets or revenues—can apply for on-tap bank licences, as multi-business concentration and systemic risks for depositors, policyholders and investors are effectively ring-fenced, then arguably banks run by well-reputed industrial groups that operate across sectors can surely be administered with some effort.
Greater monitoring of related party intra-group transactions, coupled with assigning higher risk weightages, insistence on tighter governance structures, and regulatory audits to ensure bank ownership stays uncoupled from management control, will avert spill-overs of any connected-lending contagion risks across the financial system. Having already ushered in scale-based rules and prudential income classification/asset-quality norms for NBFCs, RBI has ensured that divergence with banks reduces progressively.
MSMEs, a key driver of employment generation, face a credit gap worsened by the pandemic. Numerous units have defaulted or closed shutters due to uncertainty, broken supply chains and non-availability of capital. An RBI report on banking reveals that MSME credit by private banks rose by 22.4% to ₹7.9 trillion (shrinking the gap with public sector banks or PSBs to ₹1.1 trillion) but account numbers declined by 1.5% in 2020-21, indicating client de-boarding due to stress, with larger ones possibly garnering bigger-ticket or restructured loans. By November 2021, PSBs had to restructure about ₹58,500 crore in loans to about 1 million MSME accounts. While government schemes and policy support have helped, additional changes to the MSME delivery mechanism may be warranted. Besides enhancing fintech partnerships with existing banks, if reputed business houses with an impeccable track record and expertise in industrial development are given bank licences, or are allowed to bid for banks so as to focus on MSMEs through, say, differential directed commitments, it would lessen the credit crunch faced by small manufacturers. Hearteningly, RBI Governor Shaktikanta Das has been firm on RBI’s commitment to revive durable growth, aid a broad-based recovery and mitigate the pandemic’s impact on the economy.
The argument that bank licences to industrial houses be kept on hold till such time that general corporate governance standards improve is shallow. The PSB divestment exercise, likely after the banking regulation act is amended, demands that the best suitors participate, irrespective of whether they are institutional or corporate bidders, to help improve the valuations of state-owned banks. If the government intends divesting shares in PSBs before the latter lose whatever little geographic advantage remains, why shouldn’t RBI permit reputed industrial groups or corporate NBFCs to competitively bid for modernizing them and bettering their customer focus? The contention that state stakes should be diluted at any price to limited participants is flawed, for it may defeat the goal of making an honest effort to maximize the exchequer’s intake.
The citation of specific business failures as a justification to block progressive legislation is not helpful either. Past failures of listed banks (quasi-public and private NBFCs) due to business models featuring aggressive high-risk, high-return sectoral lending, not to mention fraudulent practices, require an effective remedial regulatory framework based on key learnings.
India’s banking scenario today is highly competitive, with big companies raising more money via commercial paper and bonds instead of bank loans. With high-quality, low-risk credit deployment avenues at a premium, the regulator has a bigger stake now in watching over the business models of banks to check overzealous business practices, while ensuring safeguards against any further shrinking of the banking pie.
Another RBI working group has rightly cautioned against the unregulated big-tech entry into the digital lending space. Our big threat to systemic stability today is not well-governed industrial houses getting bank licences. Instead, the keenness of unregulated big-tech to leverage their large customer bases to cross-sell opaque financial products and the crypto craze that has caught people’s imagination are graver challenges. To compete with global tech’s disruptive onslaught, full-stack digital bank licences given to strong domestic players, including business houses, could prove crucial.
The drafting of regulations for a discerning process of bank-licence issuance to respected industrial houses with good track records and for the effective monitoring of operations would not be so onerous. It will certainly not be a sell-out. If RBI chooses to take the route of permitting reputed corporate NBFCs satisfying prudential criteria to successfully bid for PSB equity stakes, it would be a win-win outcome for all stakeholders.
Ashiesh Kapoor is a management professional & corporate banker. He tweets at @Akaps0035
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