“It would be difficult to undertake credit planning unless the linked control of Industry and Banks in the hands is snapped by Nationalisation of Banks,” said R K Hazari in the R K Hazari Committee’s report on Industrial Planning and Licencing Policy in 1966.
This was one of the reasons for Nationalisation in the year 1969. From 1969 till 1993 no private banks were allowed except Bharat Overseas Bank Ltd which was founded in 1973 and taken over by Indian Overseas Bank in 2007.
In 1993 with the liberalization policy and the conditions implemented by the World Bank & IMF, banking was extended to private players. 143 applications were received from several people wanting to establish banks, from which 21 were accepted, while only 10 could finally start. These included the Times Bank by Bennet and Coleman, Indus Ind Bank by the Hindujas, even out of these ten, four failed. In 2001 Kotak Mahindra and Yes Bank were given licences. And we all know the case of Yes bank, which recently had to be saved by SBI.
In 2013, Tata Sons, Bajaj Fin serve, Aditya Birla Nuvo, Reliance Capital were among 26 applicants along with India Bulls, and SREI Infra which are now in the NPA mess. Anil Ambani had announced in August, the same year, about starting a Reliance Bank to be listed in 3 years. Imagine what would have happened if he was given a licence!
After 2014, things have further changed. The Corporates have found an easy entry into banking through Non-Banking Financial Companies. Those who already owned NBFCs are now encouraged through various means pushed by the government and the RBI. Public Sector Banks are forced to lend to them, they are being given refinance and encouraged to indulge in Co-lending.
Earlier RBI was careful to not give licences to corporates for valid reasons while maintaining certain autonomy. As per the Banking Regulation Act, before granting any licence, the RBI requires to be satisfied that the following conditions are fulfilled.
- that the company is or will be in a position to pay its present or future depositors in full as their claims accrue;
- that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors;
- that the general character of the proposed management of the proposed bank will not be prejudicial to the public interest or the interest of its depositors;
- that the company has adequate capital structure and earning prospects;
- that having regard to the banking facilities available in the proposed principal area of operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors, the grant of the licence would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth.
In November 2020, the Reserve Bank of India released a report of its Internal Working Group (IWG), which recommended that large corporate/industrial houses be permitted to promote banks, subject to necessary regulatory amendments. In a similar vein, it recommended that well-run non-banking financial companies (NBFCs), including those owned by corporate houses, be considered for conversion into full-fledged banks. It also allowed for the raising of the ‘cap on promoters’ stake in a private bank from the current 15% to 26%. Though RBI claims that suggestions were taken from the public, it doesn’t disclose the details of the suggestions received. The Centre for Financial Accountability and various organisations had opposed the draft and given alternate proposals. Many experts have written against licences to corporates including Raghuram Rajan, Viral Acharya, T T Rammohan, C P Chandrasekhar among others.
Put together, the recommendations make way for corporate entry into banking, which has not been possible since the bank nationalisation of 1969. The RBI has accepted 22 out of the 33 recommendations of the internal working group, which paves way for private domination in the financial system through it has not accepted corporate entry into the banking system directly. It appears to be taking a cautious step, considering the opposition in the media and by some political parties.
It is interesting to note that the internal working group recommended that the large corporates/industrial houses be permitted to promote banks in spite of opposition from the majority of the experts except one it consulted, as seen from Annexure 1 to the report.
‘All the experts except one were of the opinion that large corporate/industrial houses should not be allowed to promote a bank. The main reason being the prevailing corporate governance culture in corporate houses is not up to the international standard, and it will be difficult to ring-fence the non-financial activities of the promoters with that of the bank. Stress in non-financial activity may spill over to banks. The corporate houses may either provide undue credit to their own businesses or may favour lending to their close business associates. They may influence lending by the bank, to finance the supply and distribution chains and customers of the group’s non-financial businesses, thereby creating unreported risk to the bank. There are various ways of circumventing the regulations on connected lending and due to complex structures of entities, cross-holding of capital, the disbursal/diversion of funds to group concerns is difficult to check. It is difficult to prevent the influence of corporate houses on the Board in such banks. Assessing ‘fit and proper’ status of the promoters and its large number of group entities is very difficult.’
As of now, the RBI has already accepted the recommendation that Non-Banking Financial Companies with 10 years of experience can become Universal Banks, Small Finances Banks with 5 years of experience can become Universal Banks and Payment Banks with 5 years of experience can become small finance Banks which can provide loans which Payment Banks can’t.
So Bajaj Finance, Mahindra & Mahindra, Muthoot Finance and Tata Capital Financial services can become Universal Banks. Airtel, Jio Payment Bank and Paytm can become small finance Banks in 2022. Power Finance Corporation can become a Universal Bank and the Postal Bank can become a small finance bank, which this government is not going to allow.
As the promoter shareholding has been increased to 26% from 15%, the promoters, meaning the corporates, can have full control over the banks.
RBI data shows that as of March 2014, 82% of the bank branches, 65% of the loan accounts and 75% of the outstanding loans were with public sector banks. As of March 2021, only 68% of the bank branches, only 37.5% of the accounts and 58% of the outstanding loans are with public sector banks. This will further deteriorate.
The public banks will be called inefficient and will be privatized, including the SBI. The danger is that few oligopolies like Ambani, Adani and the Tatas will have total control over the financial system. They are not going to fulfil the conditions mandated in the Banking Regulation Act and will collapse over a period of time as we have seen in the past and their functioning will be detrimental as experts have informed the RBI committee.
The risks mentioned in the IWG report such as misallocation of credit, conflicts of interest, extensive anticompetitive practices, risks relating to intra-group transactions, connected lending, circular lending, moral hazard risks, and the risk of contagion will come true.
In the meanwhile, the poor, low-income, and middle-income customers, who constitute the majority, will have to depend on NBFCs, the new Shylocks who will charge huge interest for loans. Income inequality will further increase. The oligopolies will not only control the financial system, but also the political system. Democracy will perish!
Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation.
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