It?s hard to imagine the banking space in India without an HDFC Bank or an ICICI Bank. RBI clearly knew what it was doing when it handed out about a dozen licences, two in 1994-95 and the rest by 2003-04, with UTI being one of the first to win a licence. The new banks have made a huge difference to the way in which banking is done in the country today; clearly competition has paid off and public sector banks have been forced to pull up their socks. True, there have been some mishaps and some near mishaps. Of the newest entrants, four, including Times Bank and Global Trust Bank, have merged with other banks; while a couple of them couldn?t build scale, another suffered a misadventure in the stock market. But the banks promoted by non-banking financial companies or the erstwhile financial institutions, such as an Axis Bank or an HDFC Bank, are doing exceedingly well.
Do we need more banks? Given that roughly 50% of India?s population doesn?t have access to banking facilities, the answer should be a resounding yes. With 70,000 branches for 1.2 billion, the country is clearly under-banked with around 58 branches for a million people. And competition never hurts. But while there may be a need for more financial services, there?s no real hurry to add banks. Should large industrial houses be allowed to play bankers? Unambiguously no. While some industrial groups may have integrity and may pose less of a risk than a couple of incumbents, corporate governance will suffer. And given the ingenuity of our businessmen, it will be difficult for RBI to monitor these banks, and keep track of who they?re lending to, regardless of the regulations in place. RBI probably knows this better than anyone else; remember how miffed it was when one of the country?s biggest lenders recently loaned a significant amount to a big corporate, without the necessary approvals. Indeed, while the central bank?s supervision and regulatory coordination have improved vastly over the last decade, no number of checks and balances really helps. We all know it?s possible to hold a bigger stake in a company than is allowed by regulators; Indian businessmen are pros at this sort of thing.
In Korea, for instance, it turned out during the currency crisis, that many of the chaebols? biggest debtors were the owners themselves. Also, while it might seem unfair to keep out the groups that have integrity, and RBI no doubt will do a good job in screening applicants, it will be hard for the central bank to fight political pressure once it opens the doors to industrial houses. Remember what happened in IDBI and ICICI when the banks took all the haircuts and the promoters laughed all the way to the bank? It?s a pity that some deserving candidates will have to wait it out but right now the country can do without calamities in this space. RBI?s reputation is better than ever in the wake of the global financial crisis and it doesn?t need to risk anything. Also, since money is not hard to come by these days even if the minimum capital, required to start a bank, is upped three-fold or four-fold from the current level of Rs 300 crore, it may not be an effective enough barrier; it?s easy enough to show financial muscle. However, if the capital requirements are too steep, many smaller aspirants with credibility and competence may get left out.
But again, there?s no need to rush. For sure, there will be a shortage of financial services; while 60% of the rural and semi-urban population is under-banked, the number for the metros is slightly lower at 40%. Even SBI, with its 9,000-plus branches, hasn?t been able to reach out to as many customers in far-flung areas as it probably would like to. So, it?s unlikely that new banks, which will start out with tiny networks, can make too much of a difference. While there?s talk that RBI will ask them to have a rural presence, they can?t survive and be profitable unless they operate in profitable segments, too, and, therefore, need some urban presence. Indeed, even the foreign banks, who are expected to lend 32% of their net demand and time liabilities to the priority sector, manage to fulfil the quota by partly subscribing to bonds of NABARD and so on because they don?t have enough branches. That may change somewhat; it?s possible that the central bank may allow foreign banks to open more branches if they, in turn, agree to operate in India through subsidiaries rather than as branches of their parents. With the kind of trouble even larger banks around the globe have found themselves in, RBI, understandably, wants to be able to ring-fence risks. In return, it may dangle the carrot of more branches. That could be one way of taking care of some of the demand for financial services.
shobhana.subramanian@expressindia.com