Large corporates, industrial houses as bankers

Large corporates, industrial houses as bankers
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Large corporates, industrial houses as bankers

Highlights

A working group constituted by the Reserve Bank of India (RBI) to suggest measures for strengthening the banking sector in India has given its recommendations recently and the Central bank uploaded it on its website inviting suggestions from the public

A working group constituted by the Reserve Bank of India (RBI) to suggest measures for strengthening the banking sector in India has given its recommendations recently and the Central bank uploaded it on its website inviting suggestions from the public.

Though there are a number of recommendations to improve the performance of banking sector, one particular recommendation of the group drew immediate reaction. That is entry of large corporates and industrial houses as promoters of the banks.

Raghuram Rajan and Viral Acharya who earlier worked with the RBI and are quite critical of the present government decisions are two of the firsts to react stating that this would allow nonfinancial businesses to gain easy access to finances, encouraging connecting lending. In their opinion, this measure would lead to concentration of economic and political power in certain business houses.

In fact, this was one of the main reasons that led to the nationalisation of banks in 1969. Nationalisation did serve a number of social objectives including lending to the priority sector, massive expansion of the banking network more so in the rural areas not to forget the huge employment potential it generated to the educated youth in 70s and 80s.

But along with it came the problems of indiscriminate lending to crony capitalists with political connections leading to problem of massive NPAs and a consequent continuous bailing out of PSU banks with taxpayers' money. That between 2018 and 2020 in three successive budgets Central government has committed an amount of almost Rs 3 lakh crore as capital infusion into the PSU banks shows the enormity of the problem. Even after such massive infusion, most of the PSU banks are barely meeting the regulatory requirement of minimum capital.

In fact, it was Raghuram Rajan in a note dated 6th September 2018 given to the Parliamentary Estimates Committee on Bank NPAs who flagged the issue of too many loans made to well-connected promoters who have a history of defaulting on their loan by PSU banks. Public sector banks continue to finance promoters even while private sector banks were getting out. He also pointed out how some well-run banks turned sick during the tenure of one CMD alone.

I once met a person in Lucknow airport who introduced himself as a party leader in Amethi and a director in a PSU bank. I am sure any big industrial house running a bank in future would have more competent and better qualified directors. With this type of a structure it is hardly surprising that the PSU banks have a legacy problem of poor governance and huge NPAs.

Quite a number of private banks which have failed from Global Trust to Yes Bank are not owned by any major industrial houses. What comes out from above as the main problem for banking sector in India is undue political interference and a bad regulatory framework. Till that is fixed, there is going to be a serious problem in banking sector whether they are owned by government, or privately owned either by corporates or otherwise.

When a bank has to be bailed out with taxpayers' money, from the taxpayer's point of view it hardly matters whether he is bailing out a PSU bank or a private bank owned by a crony capitalist or by an industrial house. When the problems of regulation are endemic, irrespective of who owns the bank, it would be unfair to single out the corporates and industrial houses and then say regulating them is going to be a problem.

In fact, some of the well-run corporate houses like the ITC and the TATA may well be careful while running a bank so that their brand name as an industrial house or a corporate does not suffer due to any problems cropping up in the bank. There could be innumerable ways of ring fencing and ensuring that the financial strength of the bank is not misused by the corporates for their in-house business requirements. For example, such corporate houses may be given license to do only retail banking. Or more stringent ratio between the capital and the deposits can be fixed.

In India, bank credit to private sector is 50% of the GDP whereas in countries like China, Japan and the USA, it is up to 150% of the GDP. There is no denying the fact that we need to expand the banking infrastructure in the country to support the credit requirements of a growing economy. PSU banks have a serious legacy problems of NPAs and the fiscal space for the government to come to their rescue is also shrinking.

It is time to allow more players to come into the picture and expand the size of the pie with stringent regulatory framework in place rather than denying entry to some apprehending a possible issues that could crop up at a later date.

(The writer is former Chief Secretary of Andhra Pradesh. Views expressed are personal)

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