Synopsis–
Reactions to the recommendation allowing industrial houses to own banks have been strident. The main contentions being that India had eschewed large corporate houses from owning banks for over 50 years for good reasons that still stand. So, goes this line of thinking, it isn’t — at least now —the right time to change the policy.
Reserve Bank of India’s (RBI) internal working group (IWG) recommendations have been on several matters regarding bank licensing. But attention has been exclusively focused on the matter of the entry of large corporate and industrial houses promoting and owning banks. This has eclipsed other recommendations with potential long-term implications. For instance, two other key recommendations — cap on non-promoters’ stake at 15% and conversion of large non-banking financial companies (NBFCs) into banks — also require our attention.
Reactions to the recommendation allowing industrial houses to own banks have been strident. The main contentions being that India had eschewed large corporate houses from owning banks for over 50 years for good reasons that still stand. So, goes this line of thinking, it isn’t — at least now —the right time to change the policy.
I Love Them, I Love Them Not
First, as RBI’s policy guidelines for licensing new banks from the early 1990s can attest, the need to bar large corporates from banking is not a long-held view. RBI’s policy has been oscillating since the early 1990s — 1993, no restriction; 2001, explicit prohibition; 2013, no bar; 2014, explicit prohibition for small finance banks (SFBs), open for public sector banks (PSBs); 2016, explicit prohibition; 2019, explicit prohibition; 2020 IWG, positive endorsement.
Second, the reaction to the recommendation is disproportionate. For starters, this is a recommendation, not yet a policy. Also, the recommendation is subject to bringing in certain statutory safeguards upfront to prevent connected lending and exposure to own group entities. In addition, even if we assume the recommendation is accepted as policy, there is unlikely to be a rush from large corporate and industrial houses for owning banks or a great enthusiasm in RBI approving them. If we go by past experiences when corporates were permitted to apply for bank licences, RBI did not consider many of them to be ‘fit and proper’.
The need of the hour, and the times to come, are more banks of large and small sizes, continuous infusion of large capital into banks, and the presence of an anchor investor with large stakes, deep pockets and visible commitment to continue to put in large stakes, thus providing confidence to other investors. After RBI’s on-tap universal bank licensing policy since 2016, there has hardly been any serious application. Additional eligible entities need to be explored. Large corporate and industrial houses do fit the bill in principle. However, safeguards as recommended by the IWG need to be worked on. The IWG found the extant distinction between different types of nonpromoters as inappropriate and unwarranted. Hence, it has recommended a uniform 15% for all types of nonpromoter persons and entities.
While this provides more elbow room for individual and non-financial entities (from the current permissible limit of 10% to the proposed 15% stake in a bank), it means a heavy restriction for regulated, well-diversified and listed financial entities. Instead of the currently permitted up to 40% stake, they will also be restricted to 15%.
Growing Roots, & Branches
The rationale for such big reduction is not clear. If accepted, this recommendation can lead to several unintended consequences. First, a promoter can’t be dislodged (so long as there is no problem with the bank). Second, a lethargic promoter can lead a bank to low-level equilibrium. Third, when there is no promoter, no anchor investor is possible. Fourth, with no special recognition for well-regulated, diversified and listed financial entities, there will be less opportunities for technical and managerial knowledge-transfer.
These problems can be addressed, if the recommendation for limiting the promoter’s stake at 26% is extended to anchor investors, at least in cases where there is no promoter. This extension is actually to be preferred even when there is a promoter, so that the entrenched promoters will always be at notice. The IWG’s recommendation relating to conversion of large NBFCs (with assets of more than `50,000 crore) into banks is difficult to understand. Current policies — both for universal banks and SFBs on tap — fully enable any NBFC to be eligible for promoting or converting into a bank. So what addition or modification has IWG brought on by this recommendation? It is not clear.
It recommends that large NBFCs are to be ‘considered’ for conversion. One would have appreciated if they were ‘mandated’ to be converted, given the size and the need to be regulated like a bank. It would be a neat solution to make these de facto banks de jure ones. What adds to the confusion is the IWG saying that even such a ‘consideration’ is to be on higher due diligence. It goes on to say that it is ‘imperative for them to qualify a stricter set of criteria’. This works at cross purposes with the arguments put forth by IWG in support of making large NBFCs bank-like. It should actually have been almost an automatic route for a large NBFC to become a bank, with size (above `50,000 crore), age (more than 10 years), regulatory and supervisory comfort, high capitalisation, low non-performing assets (NPAs), and record of profitability the criteria that only matter.
The writer is former deputy governor, Reserve Bank of India
aniltikotekar4sme.com 