Asking for trouble: New bank licences

Asking for trouble

Bank licences to industrial houses are a serious error

Business Standard / New Delhi Jan 09, 2013, 00:35 IST

India has not issued a new bank licence since 2004. There is a persuasive case to be made that India’s banking sector needs to be more open; but aspects of the recent decision to award more licences are, none the less, disquieting. Well-informed voices from across the spectrum of opinion have, in the past few days, been raised against the proposal to allow large business conglomerates to set up banks if they have a “successful track record” – judged, presumably, by the licensing authority – and a minimum capital of Rs 500 crore. The head of the Prime Minister’s Economic Advisory Council, C Rangarajan, has urged the Reserve Bank of India ( RBI) to start by issuing licences to “non-corporate businesses” first, and to look elsewhere only if there are no such qualified applicants. The left-leaning Columbia University economics professor and Nobel laureate Joseph Stiglitz said in an interview that it would be “very risky” to allow companies to own banks. It was not allowed in the US, he added, and correctly so; the conflicts of interest that it would open up were “sufficiently great” and regulators would “not be able to circumscribe them easily — or at all”. And the right-leaning economist Percy Mistry has also said allowing industrial houses to run banks would leave “massive scope for malfeasance”. Japan, he pointed out, is one country where banks and industries are enmeshed with each other, and it is still to emerge from a two-decade-old financial crisis.

Three voices as distinct from each other as these, and yet making the same point, should give the government pause in its relentless drive towards granting banking licences to industrialists. Ever since it was announced in the Budget by then finance minister Pranab Mukherjee in February 2010, the government has pushed hard for it, against an obviously unwilling RBI, the apex regulator for the sector, and in spite of prevailing expert opinion. Banking is not like any other sector — the conflicts of interest that can be set up in it have the potential to destabilise the entire economy and eventually cost taxpayers a fortune. As it is, Indian taxpayers are bailing out, through state-owned banks, several companies that have benefited from a cosy relationship with bankers. It is not just possible but probable that banks owned by industrial groups with many and varying interests will use their depositors’ money to keep their owners’ concerns going long after other institutions would have thought it wise to withdraw. Eventually such behaviour will destabilise the financial system, and the government will be forced to step in and write some cheques.

The truth is that India needs more world-sized and world-class banks, as the Narasimham Committee had argued. This will not be achieved by increasing the sector’s complexity and instability, the end result of awarding bank licences to industrial houses. Instead, the sector must be strengthened. State-owned banks need to be gradually privatised – whatever the horrified reactions in the Congress to reversing Indira Gandhi’s decades-old mistake – and foreign banks need to operate with fewer restrictions.

[Disclosure: Kotak Mahindra and associates are significant shareholders in Business Standard Limited]

Discussion Board/User Comments (3)
Posted by: M G WARRIER January 09 , 2013, 20:54 IST

I endorse the observations "The truth is that India needs more world-sized and world-class banks, as the Narasimham Committee had argued. This will not be achieved by increasing the sector's complexity and instability, the end result of awarding bank licences to industrial houses. Instead, the sector must be strengthened." While there may not be an easy way out for RBI to resist the present pressure from FM to somehow issue half a dozen or so new bank licences under prescription, it is open to RBI to pursue Narasimham Committee recommendations for structural changes in financial sector. Dr Subbarao will be doing a service to the nation by opening a debate on this issue and making a beginning for structural reforms envisaged in the report.

Posted by: Bhaskar Sen January 09 , 2013, 12:08 IST
Your comment against steps taken recently by the government to award license to large conglomerates to set up banks in the country must be hailed. If after more than 4 decades of bank nationalization governments want to reverse the scenario, it will simply ignore and negate the very purpose of social and developmental purposes of the banking system in the country. Not only then the present robust exposure of agriculture sector to banking will suffer a huge setback because of the private operators' prioritization in financing their own choice areas, it will also cause an immediate death of what we know as priority sector lending. Incidentally, under priority sector come agriculture, small-scale industry, retail trade, small business and small transport activities. It is a known fact, increase in outlay in the farm sector brought Green revolution that witnessed remarkable increase in foodgrain production in north and northwest region in 1970s and in eastern region in 1980s. The successive financial and banking sector reforms introduced by the government have only made the banks rush to achieve the target and making profitability as the only goal, thereby gradually undermining the real needs of the economy. To retain the characteristics of a welfare state, we have to think of leveraging norms to achieve our social goals. Your suggestion in this context for creating more "world-sized and world-class" banks as Narasimhan Committee had argued, will be relevant in the ever increasing competitive global banking scenario only when the refurbished banks in their new avatar will be able to play a significant role in social banking sector too.

Posted by: ashok January 09 , 2013, 00:27 IST
$ 100 million would barely buy a new bank a decent corporate office in BKC. India should be thinking on a much larger scale for its banking sector.


Popular posts from this blog


The King of Ragas: Sankarabharanam