From the point of view of bankers, customers are sticky and can be exploited. Customers, on the other hand, often feel trapped. The textbook answer to this problem is to allow more banks to operate. A lot of sensible people believe that more players mean more competition and that more competition means better customer service and cheaper prices. This is true of many sectors, but not banking services.
Almost three years ago, the ministry of finance - which has many major and critical economic issues to deal with - somehow got interested in telling the Reserve Bank of India (RBI) that the central bank should issue new bank licences. But the RBI either had no interest in increasing competitiveness among banks or was simply too slow. I suspect it is the former. So, although the finance minister was keen on it, the RBI was sitting on the applications - until Raghuram Rajan became RBI governor. Dr Rajan requested former RBI governor Bimal Jalan to head a committee that would screen the applications for bank licences and recommend the applicants to pick from. But Dr Jalan has already spent a month picking his team, which now includes one former banker, one former central bank official and one former stock market regulator. Even as I write this piece, I read that the finance minister is already gently forcing the RBI's hand - he wants seven new licences to be given.
The question is, will seven new banks change anything for retail customers or small businesses, the two segments that are usually at the mercy of banks? Or is something else needed to transmit the benefit of "competition" to customers? The new bank licences will not automatically make things better for customers. Customers will benefit if the RBI, the "regulator", applies what is being termed "intrusive regulation" or "twin-peak regulation" around the world (financial conduct and prudential regulation being the two peaks).
But so far, the RBI has been particularly protective of its flock - the bankers. There are innumerable examples of this. One, the central bank has been niggardly about giving licences to new banks, which, in turn, protects the high margins of private banks and condones the inefficiency of public sector banks. Two, on issues that affect customers' interests, it has often gone to bat for banks. Three, when banks are caught flouting norms, the effort is to hush it up rather than making an example of them - not unlike the behaviour of self-regulating professional bodies of accountants or doctors. When Global Trust Bank collapsed, a public sector bank was picked up for a shotgun wedding over a weekend. We never got to know how bad things got at Global Trust Bank under the RBI's watch, while the failed bank's promoters and officials got away easily. The RBI plays God, rather than a mere referee, for the banking sector.
In 1993, six new private banks were issued licences, after three decades of misguided nationalisation. In 2001, just two more were allowed in. So, parallel to two decades of fast economic growth, just eight new banks have been issued licences (apart from a few institutions that have been allowed to convert into banks). Of these, four - including the Bank of Punjab, Centurion Bank and Times Bank - were sold at a good profit. Only Global Trust Bank collapsed. Those that survived are enjoying extraordinary profits that a competitive marketplace would not allow.
So customers have nothing to get excited about seven new banks. As it is, banking is a slow-growth and capital-intensive business, and so new banks take time to attain a meaningful size to make a difference. But the point is that "competition for the consumers" (of banking services) hardly delivers the real benefits of competition. Banks don't compete. They collude. Banks also pass on the enormous cost of technological experimentation to customers because there is no technology audit. All banks are buying the same systems and paying similar hourly consulting rates to a small group of service providers. This is recovered through various banking charges. That's why while theoretically banking charges are free, they don't vary much from bank to bank. And, whenever possible, all of them miss-sell third-party products such as mutual funds, insurance, private equity and portfolio management services. Seven new players will do exactly the same thing as the 17 before them.
For banking customers to be treated as kings, we need intrusive regulation. This is what regulators in developed countries learnt in the aftermath of the 2008 financial crisis; they changed their regulatory structure, processes and objectives accordingly. India is far behind in this regard. In response to complaints of poor customer service or malpractices, K C Chakrabarty, deputy governor of the RBI, has just one advice: change your bank. As explained in the first paragraph, this is impractical. He also admits that the RBI has no mechanism or framework for customer protection. Nobody in the Bimal Jalan committee is likely to speak powerfully for customers.
I wait for the day when Raghuram Rajan, the new RBI governor, will first use the word "financial conduct" in one of his statements. Until then, consumers will have little to look forward to in the new bank licences.
The writer is the editor of www.moneylife.in
editor@moneylife.in
editor@moneylife.in