There have been many debates on inviting corporates into banking sector and give them licenses to operate. Reserve Bank of India, Finance Ministry, and Corporate houses interested in banking licenses have been discussing the possibility of it for quite some time.
Though the decision is yet to be taken, there is very high possibility that this is just a matter of time when businesses will be allowed to enter the lucrative banking sector. RBI has issued draft guidelines (http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/2FPR290811.pdf). The purpose of issuing draft guideline is to attract viewpoints, criticism, and suggestions to make it more effective and acceptable.
Much ado about banking
Why is there such a hue and cry over allowing businesses to set up banks? The objection is coming from several quarters including the concerns raised by RBI too. The concern of RBI mainly stems from the fact that allowing businesses in banking will see many businesses asking for permission for it. This may well become a nightmare for RBI to manage so many financial institutions with the limited workforce and power it has. Moreover, there may be problems which are not anticipated by anybody as of now. This is a hot issue, not only in India, but countries across the world.
We will, in this article, analyse the issue and understand the proponents as well as opponents of this regulation.
Supporting the move
What is big deal about this? Do we not have private banks in India? The answer is yes. We have banks such as HDFC Bank, ICICI bank, Axis bank, Yes bank, and many more. They have been doing their duty pretty well and serving the retail and business customers with as much care and service as any public sector banks can claim. In fact, in certain situation such as financing entrepreneurs, private banks have done a yeoman job.
Businesses have shown that they can use the capital in a much more effective way than the public sector and Government owned units. The operation is faster, turnaround time is less, and the response is quick. Today, private banks have shown much innovation in business processes and product offerings than public sector banks. It was HDFC bank that started online banking for its customers. Others followed its lead.
Since the liberalization in 1990s started by Narsimha Rao Government when it permitted few private banks to set up operation, banking services have seen multi-fold growth in volume and great improvement in efficiency. In fact, this move was supposed to have revitalized the banking sector in India.
Today Reliance power takes loan of 10 billion USD from China Development Bank. While there is certainly the element of involvement of Chinese company in supplying the power equipment, we cannot deny the fact that no bank in India can lend 10 billion USD. This is the same point raised by former chairman of SBI, O. P. Bhatt, who said that India needs banks which are 10 times bigger than the existing SBI to fund the growth of Indian economy. Allowing businesses in banking sector may help achieve this goal.
The final point is that we have businesses such as Tatas and Birlas, and Mahindras which have shown integrity and honesty in public life. At least Mahindra has also got experience in running bank. There is no reason to believe that they will squander public money or use it for their personal gain. Even if, there is doubt, this can be handled by effective regulation.
Opposing the move
The opposition stems from the fact that banks handle public money. In that sense, banks are custodian of people’s faith in their integrity and honesty. Indian banks have shown admirable maturity in handling public money. RBI has shown commendable competence in tacking banking irregularity issues such as Global Trust Bank problems few years back. The doubt that naturally arises is that can businesses show the same accountability and honesty. The answer varies depending on which business house you discuss about. The problem is that once the guidelines are set up, following the condition becomes the priority and qualitative values such as honesty, integrity, and accountability take the backseat.
Recent cases of corporate greed and corruption have not helped the cause too. Satyam scandal, 2G scams, Radia tapes, and mining scams have only added to the mistrust of people on corporate houses.
Large scale banking failure in America and Europe has added to the mistrust of private banking. At the same time, India and other developing countries came out unscathed from this turmoil. The credit is usually given to the conservative banking practices and Government policies in these countries. Allowing businesses into banking will kill this advantage and expose us to the same risk that western world faced.
There is another fear that businesses will use banks to fund their own ventures. The ventures could be risky which can put the depositors’ money in danger and make it harder to recover. Banks get low cost money through CASA (Current Account, Saving Account) deposits. They lend this money to corporate at higher rate and earn the difference as net interest income.
Finally, does RBI have resources, risk management system, and above all power to control and punish the errant banks? Today it is easier because majority of banks belong to public sector where conservative practices diminish risk to a large extent. Moreover the number of private banks is still small and manageable. Once we have plethora of banks from businesses, RBI will find it hard to oversee the system. The problem will be compounded with different stakeholders, interests, and possibly untoward practices.
This is a difficult proposition to answer. The dangers are high, especially in a country like India where regulations are generally broken, norms are flouted, and unethical practices are not punished. However, this is not to say that allowing businesses in banking is a wrong step. This is not such a great problem that can’t be overcome. If Government and RBI implements tougher regulations and stricter licensing criteria, we can make it successful. This can very much fuel another banking revolution and help Government in its effort to include the non-banking population.
Finally, If India is looking forward to become a power to reckon with, excuses like not able to contain the errant banks and businesses will not help her achieve her objective. Problems are no excuses for not doing the right thing.