Should industry get licence to bank?

Where is this capital going to be raised? Public sector banks,which make up three-fourths of banking,can raise this from the market. But that would require the government to match capital infusion,lest its share be diluted below 51%. Given the fiscal demands from other quarters such as health and education,employment programmes (NREGA) and the food security act,the priority for injecting bank capital from the general funds of the Government of India will be,and indeed should be,low. In fact,the government has already tapped into a World Bank loan to recapitalise many public sector banks. Hence the gap in banking capital needs to be funded from private (not necessarily foreign) sources. Industrial houses already have this capacity,with a demonstrated ability to provide all other financial services such as mutual funds,non-bank finance,insurance and broking,and all with adequate capital backing.

The other big challenge requires last mile reach to provide financial services to 100 million new households,many of whom will join the ranks of middle class in one or two decades. The chairman of UIDAI has recently publicly proclaimed that financial inclusion is at a tipping point,with several factors coinciding to enable exponential growth. Here too,the role of private banks,promoted by strong balance sheets and proven track record in distribution and service,will be useful,nay critical. Eight out of top ten economies (excluding India) already allow corporates to hold banking licences. The two exceptions are the US (which has more than 5,000 banks anyway) and China (whose model is not for India to follow,at least in financial services). All these economies allow anywhere between 20% and 100% ownership to corporates,with a requirement to dilute beyond a certain size. These regimes also put restrictions like arms length relationship,no connected lending to group entities and severe penalties for breach to prevent abuse.

RBI just celebrated its 75th anniversary. Indias regulatory capacity and technology have come a long way since 1969,our D-day with bank nationalisation. Industrial houses ought to be in the reckoning for the next wave of licence expansion. Some earlier committees,including those of RBI itself,have advocated that industrial houses ought to be considered for banking licences. The industrial houses typically have access to deep and patient capital,capacity to hire the best talent,a proven long-term track record in taking distribution to remote corners and an ability to execute technology and innovative ideas.

The author is chief economist,Aditya Birla Group. Views are personal

K Cherian Varghese

Allowing industrial houses to set up new banks will result in corporates dominating the economy and influencing policy,a threat to democracy itself

Before discussing whether industrial houses should be allowed to set up new banks,we have to analyse the objective of permitting new banks to be set up. New banks should achieve the twin objectives of assisting sustainable economic growth and financial inclusion.

With all their inadequacies public sector banks have been instrumental in assisting the enterprise and emergence of many new industrial houses in India,leading to a vibrant economy. This would not have been possible if the banking system was owned by industrial houses. They would have been reluctant,if not opposed to the creation of new business houses that would offer them competition or challenge their pre-eminent position.

Going by the record of Indian corporate houses,it cannot be anybodys case that banks started by them will serve the objective of financial inclusion. It is the nationalisation of banks that resulted in banking services being made available to ambitious entrepreneurs who had no collateral,to the less privileged and to those in rural areas.

Putting high threshold limits on capital requirements for new banks will make only large corporate houses and people associated with them eligible to apply for licences. Banking is a highly leveraged business; with capital of Rs 9 a bank can build up assets of Rs 100. This provides immense scope for harnessing resources and concentrating economic power. With their vast resources and extensive physical reach through the branch network,banks can exercise stupendous influence in different areas of national activities. Allowing industrial houses to set up new banks will result in corporates dominating the economy and influencing government policies.

Concentration of economic power in the hands of industrial houses is a threat to democracy itself.

There was a line of argument in the past that India needs a small number of large banks. Big banks globally have not been the best examples of risk management and safety as demonstrated by the recent global financial crisis. Governments had to intervene to bail many of them out,even in countries that are wedded to the philosophy of market economies.

Large banks tend to become very impersonal and insensitive to customer aspirations. Even in well-known banks,service delivery is poor unless it is system-driven. It is difficult to get across to anyone in these banks for redressal of a problem,unless you are a rich customer with a relationship manager assigned to you. The answering machine,which gives direction to press an assortment of buttons,not only wears out ones patience but also adds to the telephone bill without any tangible result,except frustration and anger.

It is time that we set the stage for a large number of well-regulated small banks to cater to the needs of the aam aadmi,while big clients can be served by the larger banks. A minimum capital of Rs one crore may be stipulated for such one branch banks to be set up by professionals; for every additional branch,further capital of Rs one crore may be prescribed. Such banks may be permitted to be opened by professionals with proven track records.

The essence of banking is the personal touch and we may be able rediscover the pleasure of banking relationships through such small institutions,which may serve as a model for the rest of the world. Industrial houses are least suited to establish banks that are meant to promote equitable economic growth and facilitate financial inclusion.

The author is former chairman,Board for Industrial and Financial Reconstruction and Union Bank of India