Let business houses with good track records run banks

Source: This post is based on the article “Let business houses with good track records run banks” published in Livemint on 8^th Feb 2022.

Syllabus: GS3- Mobilization of Resources

Relevance: Corporatization of banks

News: The RBI has revised the guidelines to allow 26% long-term promoter ownership in private banks based on recommendations of its internal working group.

What are the arguments in favour of allowing bank ownership by corporate business houses?

One, the RBI has allowed non-industrial groups having financial businesses (with the share of assets of financial businesses of the group exceeding 60% of group’s total assets) to apply for on-tap banking licenses. The issues of securing depositors and investors from systemic risk have been addressed with suitable guidelines. The same can be extended to well-reputed industrial houses through appropriate regulations.

Two, there are certain risks associated with giving banking licenses to industrial houses e.g., it is necessary to ensure that the ownership does not impact the management of the bank and its lending policies. Such risks can be avoided by greater monitoring of transactions, assigning higher risk weightages, tighter governance structures and proper regulatory audits.

Three, it will help in ensuring timely availability of credit for MSMEs which are key driver of employment generation. According to an RBI report, credit by private banks to MSMEs rose but the numbers of accounts declined by 1.5% in 2020-21 i.e., the number of MSME entities availing credit declined. It indicates stress suffered by small units, major restructuring of loans and shows that major portion of loans are cornered by big units.

Four, allowing the industrial houses to bid for divestment in the Public Sector Banks will help improve their valuations (more bidders) and thus help better realizations for the Government.

Five, ownership of Banks by industrial houses is expected to help in moderanization of the Banks and increase customer focus thus improving service levels.

Six, past failures of listed banks were due to their faulty business models like aggressive high-risk, high-return sectoral lending, fraudulent practices. Hence, past failures should not be used as argument against corporatization of banks.

Seven, RBI working group has cautioned against the unregulated big-tech entry into the digital lending space. The unregulated big-tech are using their large customer bases and cross-selling opaque financial products like crypto. Hence, to compete there is need of full-stack digital bank licenses given to strong domestic players.

What is the way forward?

 First, India’s banking scenario is highly competitive and big companies are raising more money via commercial paper and bonds instead of bank loans. The regulator has to watch over the business models of banks to check overzealous business practices and prevent the shrinking of banking sector. Hence, allowing industrial houses in banking sector is a win-win outcome for all stakeholders.

Two, there is need to increase fintech partnerships with existing banks and allow reputed business houses with good track record to run banks. They will help in increasing focus on MSMEs through differential directed commitments.