With just 80-odd banks in the country and each bank branch serving as many as 13,400 customers, it is obvious India is woefully under-banked. To that extent, the idea of licensing new private banks is a good one. Whether it is converting existing non-banking financial companies (NBFCs) into commercial banks, or allowing industrial houses into the sector, or whether the minimum levels of equity should be Rs 300 crore or more, the Reserve Bank of India’s (RBI’s) discussion paper on the subject lists elaborate pros and cons of each move. A very high capital requirement, for instance, is a good thing to the extent that a well-capitalised bank is desirable, but put the limit too high and that could ensure there are few takers for a banking licence. Similarly, there seems a natural logic to allow NBFCs to convert into banks given that they are regulated anyway, but the RBI paper points out that the level of regulation and scrutiny is quite rudimentary, certainly not enough to warrant an automatic conversion to a banking licence where thousands of crores of public deposits are also at stake. More so when, as the financial crisis has shown, it is almost mandatory for the government to bail out any bank in trouble. On the much commented issue of whether industrial houses should be allowed to return to banking, RBI lists three “pros” and 11 “cons”! The “pros” are obvious — not too many non-industrial groups have the capacity to bring in Rs 300 crore of equity capital, and there is the obvious managerial depth an industrial group brings to the table. The “cons” are equally obvious and the principal one is that the banks could possibly be used to, primarily, bankroll the groups’ own ventures. And to the extent this is proscribed, such lending could take place through front companies, through suppliers and so on. RBI has, of course, offered solutions like ring-fencing, independent directors and getting no objection certificates (NoCs) from various investigating/regulatory agencies like Sebi, CBI, Income Tax and so on.
There is no doubt that greater governance and inspections of RBI are necessary, but the track record of NoCs is quite poor, and more so now since compounding of offences has increasingly become the norm — so, any company found guilty of violating guidelines can just pay a fine, settle the matter and then be declared “fit and proper”. It is indeed interesting that a year after Congress party president Sonia Gandhi claimed that it was Indira Gandhi’s decision to nationalise banks that saved India from the global financial crisis, the Union finance ministry has opened a debate on whether it is not “fit and proper” to allow industrial houses to own banks! That said, the fact that just one of the four banks promoted by individuals since 1993 has managed to survive, that others had to be merged/amalgamated to achieve growth goes to show the RBI’s system of selecting licensees and of inspecting them later is not as robust as it should have been. This means “fit and proper” regulation and supervision are probably more important than merely defining fit and proper entry and licensing criterion.
