Screen corporates for grant of banking licences

NOTHING clears the air and clarifies issues like a good debate and the Reserve Bank of India’s internal working group’s proposal of giving banking licences to corporates is important enough to deserve such a public airing. Till now, the debate has been somewhat one-sided, with most experts opposing the idea and RBI sources defending the suggestion in their usual circumspect language. So, it is worth playing the devil’s advocate if for no other reason than to bring the key issues out in the open.

Let us recall that business houses were close to and influential in several large banks at the time they were nationalised. Prominent business interests based in Bombay (as it was called then), including the Tatas, were the founders of Bank of India. The Birlas — none other than GD Birla — were promoters of the Calcutta-based United Commercial Bank.

Nationalisation, undertaken to enable farmers and small-scale business get credit, changed all that. A half century has passed since then. It is possibly time to go back to the basics and see what we can learn from 50 years of experience.

Since then, the regulatory regime has extensively eased restrictions on Indian companies seeking to raise foreign funding and today prominent well run Indian companies wanting to access foreign flows have no problem doing so. In fact, when global interest rates are more attractive than domestic rates, companies with the right credentials have preferred to access foreign funding.

These are companies with good credit rating, in the good books of analysts and command a market premium. For non-officials, these are as good a set of criteria for determining which entities are ‘fit and proper’ in getting a banking licence.

The RBI has, for its part, in the past decades extensively improved and expanded its supervision and surveillance efforts. Unfortunately, that has not prevented several institutions, from IL&FS to LVB, from either failing or having to be rescued while at the brink of it.

The RBI’s discharge of its role of a policeman has suffered from a key shortcoming. It comes to know of what is happening after important market players have got wind of developments and acted on them.

So, the RBI’s argument that it proposes to be more elaborate in defining what is ‘fit and proper’ and will improve upon its surveillance is neither here nor there. For all practical purposes, the generally available rules of thumb that we have just identified will do the job as well as it can be done.

Now we come to a key change that has happened in the Indian financial sector over the past couple of decades — the rise of microfinance, the better ones coming under RBI supervision as NBFC-MFIs and thereafter the best among them getting a licence to function as small finance banks and one (Bandhan Bank) being allowed to operate as a universal bank.

During the post-nationalisation period, banks, particularly the public sector ones, went up to a point in opening rural branches to make available agricultural finance and across their operations credit to medium and small enterprises.

But under the weight of the huge load of non-performing assets, they have now gone back on both branch expansion and installing ATMs. They are no longer in the business of taking banking to the masses and are in the process of saving on operational costs in an attempt to restore health to their bottomlines.

As a result, the whole developmental role of Indian banking has been shifting to microfinance through NBFC-MFIs and in particular, the small finance banks. Overall, they not only keep giving small loans without collaterals, their recovery rate remains far higher and NPA levels far lower than that of public sector banks. The declared policy can be to let the NBFC-MFIs and small finance banks which have come up through the microfinance route to slowly take over the developmental role of Indian banking, so far carried by public sector banks.

This means that large banks, both public sector and private, will focus more and more on hard-nosed lending, having their bottomline in mind. It is in this space that corporate groups which get a banking licence can come in. They will bring in the resources needed for recapitalisation which the government is hard put to find.

But this still leaves open the phenomenon that we have seen till now — powerful entities cornering the loan books of large NBFCs and medium-sized private sector banks and eventually bringing them to grief after defaulting, having spirited out their own funding to overseas tax havens long ago. This group can be left out by issuing banking licences only to those corporates which fulfil the criteria that we have outlined above — good credit rating, good standing among analysts and commanding a market premium. The point is that these entities do not need to pocket other people’s money.

We can assume that a Bajaj Auto, Infosys or TCS would get a banking licence as soon as they apply for it. The reality, of course, is that in all likelihood, they would not be interested, choosing to stick to their own market segments where they are the most efficient and have good global reputations. So yes, corporates can be given banking licences, provided we know how to do it, not going by the RBI’s hugely complex and opaque ‘fit and proper’ criteria, but by following a few simple rules of thumb.