Corporates and their hopes

The brouhaha over the RBI’s latest grant of ‘in-principle’ approval to two private players for getting into banking business on the eve of polls behind, the apex bank has not made any dramatic departure from established processes and procedures in this regard. This is notwithstanding a top-notch globally acclaimed economist as the Governor of the central bank in the country Raghuram G Rajan who has a manifest mind of his own. No doubt, the country’s retail banking segment is set to breathe a refreshing whiff of competition when following the recommendation of an expert committee under former RBI Governor Bimal Jalan the apex bank approved the licence to start banking activity to IDFC Limited, the infrastructure financier and Bandhan Financial Services Limited, a microfinance institution from Kolkata. 

The approval for making a foray into retail banking business to the two entities has come at a time when none of the big corporate houses that included billionaire Anil Ambani-controlled Reliance Capital Ltd, Aditya Birla Financial Services Group and L&T Finance Holdings Ltd, an arm of engineering to information technology conglomerate Larsen & Toubro Ltd could succeed in securing a licence.  

The RBI‘s approach in this round of bank licences is described as conservative. This is so at a time when there is public concern about good governance of the banking institution and its ability to price risks properly and prudently.  Hence, the RBI’s reservation in granting licences to corporate houses and brokerage companies presumably because of potential conflict of interest question is a welcome sign from the regulator which has a great deal to answer for when aberrations arise hitting the financial stability of the system. Policy analysts pertinently praised the RBI for having deftly handled the licence grant operation in an orthodox way as otherwise it would have been accused of abetting regulatory capture if the big business entities had got into banking and preempted  advances for their own activities.

The RBI has also weighed the recommendations of a report from the House panel headed by the former finance minister Yashwant Sinha that went into the ‘Policy on new licences in the banking sector’ and presented its report in October 2013 in Parliament.  In his deposition before the Committee the RBI Governor defended the 2013 shift in the Bank’s 2001 guidelines in favour of granting banking licences to large industrial houses. The main factors, the RBI maintained for this shift in the 2013 guidelines,  are that capital requirement can be easily provided by large industrial houses and that such big houses have already been allowed entry into other financial service sectors and are competing with banks on both assets  and liability fronts. Besides, the big corporate houses have a long and credible history of building and nurturing new businesses in highly regulated sectors such as telecom, power, airports, highways and ports. 

While evidently not being convinced about the defence, the  House Panel was also skeptical about the safeguards put in place by RBI such as ‘fit and proper’ criteria, ‘exposure norms’ would be effective enough to avert banks promoted by industrial houses from ‘cozying up’ to their industrial owners. Hence it cautioned the regulator/government to ensure that no recurrence of the pre-nationalised phase takes place when the management of private banks deployed their funds to extend undue favour to their own industrial owners without concern to social priorities set by the government! 

It is not quite clear whether the RBI under the astute governor paid any heed to this potential threat to the financial system and refrained from choosing any of the big corporate houses this time around. However, the corporate houses have not altogether lost out in the gambit and it is a refreshing tidings the RBI said in a statement on 2 April that it intends to give licences more regularly – virtually ‘on tap’ – and that it would also frame categories of differentiated bank licences. Differentiated licences would be for services such as a payments or lending-only bank. Perhaps the corporate houses still can get cocky to try out in new financial services as they had done in the past!

Be that as it may, the apex bank’s caution about not giving nod to industrial houses for conflict of interests reasons appear thin when the same corporate houses through proximity to political classes were able to get their jumbo loans waived off or written-off from nationalised banks or wrested rescue packages for sector-specific woes as it had happened in the case of steel industry, airlines, plantation, agricultural farmers or sugar industry more recently.  This is how the problems of private sector are socialised to make taxpayers take the tab on the controversial proposition that these industries are too big to be booted out! It is on occasions like this that the apex bank miserably failed to discipline the banking community and turned itself a mute and miserable spectator. When regulators become silent spectators and remain hapless, the confidence of the shareholders and stakeholders get shaky. It is time the regulatory agency such as the RBI which dons several hats including monetary authority charged with price stability and overseeing financial system stability got its act together to stay unchallenged in its power and prosecution of errant elements in its midst, howsoever mighty they may be. 

Now that the apex bank has plumped for a cautious opening up of the banking field steadily but surely, the gradual increase in the number of banks would level the playing field for all to benefit by best practices, besides boosting the employment opportunities and contributing to the credit requirements of the real sectors of the economy. IPA