Banking wrong on corporate houses: Why fate of banking, public finance is uncertain
Updated: Dec 30, 2020 7:13 PM
With RBI’s inability to uphold regulatory oversight, a grave crisis in banks and NBFCs is looming large.
The government is in hurry to give the corporate houses an edge over the existing players.
Atul K Thakur
The policymaking in India is often seen endangered today, the lack of expertise is its hallmark. Without strong imagination and process effectiveness, a strong urge to redefine the basic character of India has prompted Prime Minister Narendra Modi to unconventional experiments at policy fronts. On a major scale, the process of collective material loss was inflicted with the demonetisation, flawed GST implementation and hurried lockdown. The economy and people already jittered through such moves are now extremely vulnerable as the resource-strapped government is opening up the banking sector without altruism by allowing the business houses to own their banks. This precisely means that for limited equity, the corporate houses will have the liberty to play with the public money parked in the new banks. The systemic risk will grow multifold.
On July 19, 1969—then the Prime Minister Indira Gandhi had nationalised 14 largest private sector banks to give the project financing and formal credit, an unprecedented push. The historic decision proved beneficial for the country, however, it came at a cost as the state-owned Public Sector Banks (PSBs) couldn’t manage to improve their governance structure as expected. While the economic reforms that started in the early 1990s shifted the pattern of banking, PSBs particularly didn’t come to terms with the changing fundamentals and suffered with advent of organised cronyism over the years. As the degradation of ethics led to a weaker balance sheet and existential crisis for many PSBs, the country did witness even the worst show of corporate governance in private banks.
The RBI’s Internal Working Group (IWG) advocated for the private corporations’ entry into the Indian banking system—at self-confessed risk and despite the adverse opinions of the experts made during the consultative rounds. At least for public consumption, IWG was created to review the existing ownership guidelines besides exploring the option of allowing corporate houses to do real banking at their end.
On the expected line, IWG had made a recommendation on 20th November 2020 for permitting entry of corporate houses into India’s banking sector. What was astonishing was that IWG also suggested amendments to the Banking Regulation Act, 1949 to prevent ‘connected lending’ without specifying how it would be possible. Apparently, IWG members didn’t work enough to give a better alibi to defend the deeper pandemonium ahead. In the simplest argument, the corporate houses know re-routing the money and they can easily deal with the proposed naive changes.
Through the IWG report, it has been made clear that India’s past experiences hardly mean anything to those who are in helm as of now. Through this plan, the Indian banking sector will travel into time—and mimic the rationale that led to the nationalisation of banks in 1969. In the past, there was a government for people and it did a fine balancing play by ending the vicious circle of corporate-owned banking structure. In the next eleven years’ of India’s independence, the country had seen an unprecedented bloodbath on the Mint Street with complete collapse of 361 banks.
Fortunately, the trend was reversed with the nationalization of banks—and the RBI had saved the banking industry in India with keeping a pragmatic approach. All 12 old and 9 new private banks came into existence in the post-1991 period, by then, the state-owned banks had already strengthened the base of institutional credit culture and public finance. These 21 private banks are owned by individual investors and entities with a direct interest in the financial sector. Another worrying plan is letting NBFCs with minimum assets of Rs 50,000 crore and 10-years of existence to convert as full-fledged banks.
The provision of backdoor entry will increase the corporate houses’ capacity to divert the cheaper credit—and in that cycle, making the system precarious. Clearly, the US’s model is being emulated half-heartedly. The understanding should have been exactly opposite: India’s financial sector has been bank dominated unlike in the US where the NBFCs were given undue relaxations that significantly added to the factors of subprime crisis and global economic meltdown of late last decade.
Even earlier, many times, the corporate houses tempted to re-enter the banking scene from where they dethroned in the wake of banking democratisation. They didn’t succeed then as the Finance Ministry had seen such attempts undeserving and rest is the history how India successfully overcame the grave problems with the East Asian Financial Crisis in 1997-98, Y2K crisis in 2000 and Global Financial Crisis in 2008. The prudence was the ‘virtue’—and ‘ignorance’ was not blissful back then.
Raghuram Rajan, Former Governor and Viral Acharya, Former Deputy Governor, RBI have rightly argued that by allowing the corporate houses’ entry into the banking system could intensify the concentration of political and economic power in the hands of a few preferred business houses. In their most pertinent observations, Rajan and Acharya argue that “highly indebted and politically connected business houses will have the greatest incentive and ability to push for new banking licenses, a move that could make India more likely to succumb to authoritarian cronyism.” At some point of time, both were the insiders of the Indian financial system—and their reading of the spectre is judicious.
The government will not stop here and it is going to review the roles of PFC, NHB and HUDCO—also it has on card the plans to set up a new Development Finance Institution (DFI) for rural infra and covert IIFCL into another DFI. Anyone with a sane commitment to the public welfare will feel disturbed with this move wrongly disguised as a ‘reform’. With the RBI’s stand, the fate of banking and public finance at large is uncertain. The government is in hurry to give the corporate houses an edge over the existing players. The reasons would be best known to those who are wielding the power, people can at best ask: why such urgency? It is indeed unfortunate to witness an avoidable tragedy in making. India can do better without the draconian aims and laws!
Atul K Thakur is a Delhi-based policy analyst and columnist. Views expressed are the author’s personal.