He must stop playing Scrooge with private banking licenses


The establishment of a Permanent External Advisory Committee (SEAC) under the leadership of former Reserve Bank Deputy Governor Shyamala Gopinath tells us that the central bank may be about to turn on the tap for further news. banking licenses. However, if past reluctance is a guide, don’t hold your breath.

Private banking licensing was liberalized in 1993, but it took the RBI 10 more years to issue an additional license to Kotak Mahindra Bank; it took 10 more years for the central bank to issue two more licenses, to IDFC First Bank and Bandhan Bank.

Giving new licenses in homeopathic doses is not the right way to strengthen competition and the efficiency of the banking system. This is not the “on the fly” licensing regime promised until the middle of the last decade.

The experience of payment banks and small financing banks now has more than five years. The only thing the RBI’s overly cautious approach to payment banks, which was open even to the corporate sector, was to drive them away. All payment bank licensees now want to become small financing banks.

Stifling regulations made all payment banks unsustainable, and the “bank” nomenclature itself lost its meaning when applied to an entity that could not lend at all. What the RBI has created are small depository entities with payment capabilities, thus limiting their ability to grow profitably. While non-banks have launched dozens of private wallets serving the same function, the payment banks themselves are migrating to the slightly greener banks of the small financial bank.

The same damn regulatory predilections have all but killed the burgeoning microfinance industry over the past decade. Following excessive lending in the Andhra Pradesh market, the RBI imposed insane interest rate caps and rules that made it difficult to serve small borrowers and collect loans. When loan sizes are small, collection costs are high and interest rate caps should be liberal.

Extreme cases lead to bad laws, and that is exactly what the RBI is guilty of.

The RBI’s excess of caution has been partly understood through its history. In the run-up to banking nationalization, many large business groups were found to lend to their own group entities, making lending unsafe. Post-liberalization, the 1992 Harshad Mehta scam, and the post-2000 Ketan Parekh and Global Trust Bank scams have made the RBI even more suspicious.

Like a kid who gets his hands on a burning ship and then becomes frightened by any ship, the RBI’s regulatory impulses operate on the basis of fear and the suspicion that private companies cannot trust banking licenses. because they can be “abused”.

That it was the public sector banks that gave the most reckless loans to failing companies – all now to the infirmary of the National Company Law Courts – does not seem to have bothered the central bank as much as the idea that private banks can “divert” loans to related entities, and cause a systemic crisis.

The same fears and suspicions compel the RBI to enact foolish rules like the amount of equity bank private promoters can hold, while the same rules don’t apply to quasi-banks like non-bank finance companies ( NBFC) which do much the same. thing. The RBI’s Pavlovian response to IL & FS defaults has been to tighten NBFC regulation even further.

At some point, the rules that govern NBFCs and banks may converge, just as the convergence of bank payment and wallet rules has brought a group out of business. Worse yet, the RBI is already requiring that NBFCs that obtain banking licenses must relinquish their existing non-bank licenses. It’s like saying if you grow wheat you have to give up horticulture.

The RBI must grow. There is room in the Indian financial sector for NBFCs and banks, and even though they coexist in the same promotional entity, there is room for synergy, not conflict. Just as HDFC, the non-bank housing finance company, can have a harmonious relationship with its banking subsidiary HDFC Bank, and ICICI Bank with its housing finance subsidiary, there is in fact no problem for an entity. owning both a bank and an NBFC, both as both are regulated by the same entity and publicly traded.

The RBI has a “fit and proper” requirement for those who receive banking licenses, but at the moment this term is poorly defined and not transparent. “Fit and proper” should consist of creating a set of negative characteristics about a promoter (a habitual defaulter or a promoter with risky side activities, etc.). It cannot be a wandering rule that groups like Tatas, Birlas, TVS or Murugappa – all with relatively pristine business records – are seen as problematic because they have too many industrial and service companies to work with. their assets. The presumption will be that the bank cannot avoid lending to such entities since there are so many.

The “fit and proper” rule should be applied to delinquent promoters (for example, a Nirav Modi or a Vijay Mallya, both of which evade Indian laws), and not to groups which will often experience at least some business failures. When you run dozens of businesses in a group, like the Tatas do, how realistically is it that a future Tata bank won’t lend – or need to lend – to a bankable company in the group.

The only way to make banking licenses available on tap – which was promised years ago by Raghuram Rajan – is for the RBI to relax the rules for issuing new banking licenses while introducing smarter loan monitoring. Today, thanks to artificial intelligence, real-time data analysis and regular data feeds from the goods and services tax system, any smart regulator with industry data analysis expertise private will be able to stop the nonsense as it goes.

The rules that need to go, especially when the government itself is considering privatizing some of its banks, are as follows.

A, limiting the promoter’s assets to 10-15 percent does not make sense as long as the promoter has a reputation to lose. Consider the reputational damage that a failing Birla Bank or Reliance Bank would cause the group if it engages in questionable lending practices and is called by the regulator.

It’s not as if banks like State Bank, HDFC Bank, and ICICI Bank weren’t arrested for breaking some RBI rules. The attitude of the RBI should be to have a rational view of marginal violations and tough opinions only for really bad or dangerous loans. If the RBI does not imagine itself controlling these activities successfully, it should ask the Ministry of Finance to set up an independent supervisory authority to track down bad banking practices and unsafe lending.

Of them, it makes no sense to issue new banking licenses and then ask NBFC owners to convert to banks, although some might indeed do so if the regulations are changed. HDFC, for example, may consider merging with its bank if the CRR / SLR rules were different. The NBFC structure has some advantages over banks, and banks over NBFCs in other areas. There is no reason why a smart promoter shouldn’t eat their NBFC cake and have it in a bank too. As long as both entities are under strong surveillance, both should be able to exist.

The main challenge for the RBI is to monitor new banks; playing Scrooge with licenses is an escape and not a positive way to meet the new challenges and opportunities that the opening of the field to innovation and competition will bring. The economy needs more competition in the financial space, and the RBI should be the last to try to strangle it from the start. He has done this for the past three decades; it is time for him to turn a new page.

The financing of a growing economy needs many more actors ready to lend wisely. Some will surely fail, but the fear of failure cannot guide the policy of new banking licenses.

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