SynopsisThe last two decades have demonstrated the appalling inefficiency and corruption of PSBs, saddled with enormous dud loans. India urgently needs more private sector banks.
I have always said industrial houses should not be allowed to run banks because of a fundamental conflict of interest. Ideally, banks should not favour any industrial group, should limit their exposure to any single borrower, and certainly should not write off loans to favoured clients. Yet, all these malpractices were common when industrial houses owned banks prior to their nationalisation in 1969.
Hence, when private banks were once again allowed in the 1990s, the Reserve Bank of India (RBI) kept out industrial houses. Financial institutions like HDFC, ICICI and UTI had the large capital stock needed to qualify for a bank licence. Several non-banking financial companies (NBFCs) also got bank licences. But many went bust during the Asian financial crisis. Public sector banks (PSBs) continued to control 70% of bank credit, despite the rapid growth of a few private sector banks.
Not Every Micro is Soft
The last two decades have demonstrated the appalling inefficiency and corruption of PSBs, saddled with enormous dud loans. India urgently needs more private sector banks. But, critics asked, if large industrial houses were excluded, how could India find enough other companies to meet RBI’s capital requirement of at least Rs 500 crore for a universal bank licence?
I had the temerity in the 2000s to suggest that the answer might lie in microfinance institutions (MFIs). These tiny institutions often started with capital of a few lakhs. They lent small sums — sometimes less than Rs 4,000 — to rural and semi-urban women operating in borrowing groups. The notion that these pygmies could rise to become full-fledged banks drew contemptuous smiles from some observers. I was active in helping create new MFIs, such as Arohan and Sonata, and was accused of spinning fantasies for my personal favourites.
Against all odds, I have been vindicated. MFIs have, indeed, grown so fast and attracted so many new investors that they have raised enough capital to become universal banks. These not only take deposits and make loans but provide the full range of all financial services, including insurance, wealth management and factoring.
Bandhan was launched by Chandra Shekhar Ghosh as a non-profit MFI in 2001 with capital of just Rs 2 lakh. It grew phenomenally, and today has become Bandhan Bank, a universal bank. It has just celebrated its 20th anniversary. Bandhan Bank has a market capitalisation of over Rs 50,000 crore, and in pre-Covid days, had touched Rs 1,00,000 crore. It still has an NGO wing, and now aims to start a Bandhan University.
In the 2000s, India’s biggest MFI was SKS. It later merged with IndusInd Bank, which then soared to become one of India’s top 30 companies comprising the Sensex. RBI has recently invited applications for new universal bank licences, and a top contender is Chaitanya India Fin Credit, an MFI run by former Flipkart owner Sachin Bansal and former Citi banker Pankaj Vaish.
RBI also licences small finance banks (SFBs), which require a lower capital of Rs 200 crore. Such banks must funnel at least 75% of their loans to government-mandated priority sectors, and half their loans should be below Rs 25 lakh, serving small business. Several MFIs have become SFBs, such as Equitas, Ujjivan and Janalakshmi.
The Low Barrier Fief
Many MFIs prefer to remain NBFCs, which have less financial scope than regular banks, but also fewer regulatory hassles. Top MFIs have been able to remain NBFCs and raise large sums from investors. These include CreditAccess Grameen and Spandana Sphoorty. Gold loan companies like Muthoot and Manappuram Finance have also got into microfinance. Satin Creditcare began as a lender to small urban businesses and then became an MFI. All these are listed on stock exchanges.
India also has several listed NBFCs in housing finance, transport finance and other financial activities. The biggest, Bajaj Finance, began as a wing of Bajaj Auto, financing buyers of Bajaj scooters. But under Sanjiv Bajaj, it has become an independent powerhouse expanding into every segment of finance. A great stock market favourite, it once had a larger market capitalisation than the State Bank of India (SBI), the biggest bank, and more than double that of Bajaj Auto, its original parent company.
HDFC has long been the biggest housing finance company. It spawned HDFC Bank, regarded as among the finest banks in the world. The Shriram Group has been a major player in transport finance. Mahindra, Sundaram and L&T have all created NBFCs for commercial and social purposes.
Not many NBFCs want to become banks. Many prefer the light regulatory regime for NBFCs to the tough regulations covering regular banks. But banks have the advantage of being able to raise deposits at very low rates from millions of customers, whereas NBFCs have to borrow wholesale at high rates. In time, this will push many NBFCs to become banks.
In sum, there is no need to let industrial houses become banks. NBFCs and humble MFIs have proved that they can raise enormous sums from investors, more than enough to create a hundred new banks. They, not industrial houses, should be the banks of the future.