The reform debate in India has developed a single-point focus on the entry of foreign entities into various sectors.
Whether it is retail trade or education or banking, the word reform means allowing the entry of foreign players. It is really unfortunate because there are a zillion other things one needs to do in the context of reforms.
There are intense discussions at the level of the Reserve Bank of India (RBI) and the ministry of finance about opening up the banking sector to new entrants, both domestic and foreign. The usual suspects — various lobbies called industry associations — are giving their views to justify the interest of private business, both Indian and foreign.
Two critical issues in this discussion pertain to providing banking licenses to business houses and non-banking finance companies (NBFCs), and more branch licenses to foreign banks.
An associated issue is the quantity of capital that should be prescribed as the minimum. Banking is an important arm of the society because it channelises our savings and investment. Domestic saving is of the order of 35% of GDP and households contribute more than 70% to this. Financial savings constitute nearly half of all household savings.
In spite of all the hype about the Sensex and stock markets, nearly 60% of the financial savings of the household sector went into bank deposits in 2008-2009. The share of stocks was an abysmal 3%, while insurance and pension had nearly 30%. Hence banking is a crucial
element in our economy’s scheme of things. We have more than 70,000 branches spread across the length and breadth of our country.
There are surely enough experts in the RBI and the finance ministry who are familiar with the reasons why banks were nationalised in the late 1960s and even in 1980.
One of the major reasons was the misuse of bank funds by business groups which controlled banks. If industrial houses are allowed to own banks then this will go against the elementary idea of not allowing conflicts of interest.
Though lenders and
borrowers are technically different entities, in terms of commonality of interests it is the same person sitting on both sides of the table when businessmen run banks. Arm’s length
relationships and Chinese walls are of little relevance since not only do we not have exceptional policing, but the exact opposite.
The negative impact of the ownership of banks by business houses on millions of unwary depositors is going to be humongous. Hence one should perish the thought of large business houses owning banks.
The other segment being considered for more licenses is large NBFCs. Here again it will be more appropriate to have a separate regulatory body for well-run entities and remove restrictions which impinge on their performance rather than converting them into banks.
Let it be recognised that even now many of the banks are fulfilling their priority sector requirements by lending to these NBFCs. The latter, in turn, provide funds to the ultimate beneficiaries. Let well-run NBFCs be encouraged to remain NBFCs.
Let us also remember that the entry of private players in the past has not been as rosy as it is made out to be. We have the examples of Global Trust Bank, which was neither global nor trusted, TimesBank and Centurion Bank. These banks had to be absorbed by state-owned banks or more solid private banks at a huge cost.
As for foreign banks fostering inclusive growth, it’s an oxymoron. By definition, foreign banks in India have always looked at the cream of the market. In their case we must go strictly by reciprocity.
For instance, till 1994, a Citibank could not even open branches in other states of the US due to legal restrictions. But that did not stop it from demanding more branch licenses in India.
The elementary principle should be that they should have full-fledged banking companies in India or listed subsidiaries. They can’t expand in India with mere branches or representative offices. One is tired of reading in small print that all disputes have to be settled in London or Tokyo. Now is the time to demand what is required by India since the foreign banks find low-hanging fruit here and are eager to enter. Actually, we should have higher domestic statutory liquidity ratios and capital requirements for foreign banks.
The RBI and the finance ministry must allow domestic banks already operating here to offer complete net banking services to citizens without any brick and mortar facilities. It will reduce the cost of operations, provide higher interest rates to customers and will be a big success, given the love affair of the Indian middle-class with the Internet and mobile phones. Perhaps public sector banks should even float a subsidiary for net banks.
Banking reforms should focus on innovation and protection of domestic savings coupled with prudence in lending rather than flamboyance, razzmatazz and other circus elements.