Banking See Banking Do

Banking see Banking do

The Government has announced the licensing of new private “high-street” banks, with a much wider qualifying net, with up to 49% foreign holding, up from 26% previously allowed. This is a good thing as there is a considerable shortage of banks that lend money to worthwhile private enterprise and risk their arm with funding start-ups.

 Presumably, there will be less official dictation on whom they can lend to, though it would be a departure from the Government’s/bureaucracy’s way if it is indeed so. They intend to let the authorities, that is the RBI, the CBI, the CBDT etc. to go into the background and vet who can qualify to be licensed. But at least all sorts of entities, including existing NBFCs, can now apply.

There will also be safeguards that will seek to prevent the promoters from taking in deposits and vanishing. Though, of course, they could always give the money to proxies to exactly the same effect.  There will also be reasonable shareholding norms of up to 40% for 12 years and not less than 15% thereafter, so that the original promoters, don’t start trading in the banks and bank licenses themselves. And good enough seed capitalisation standards too, to make sure the banks have depth and commitment.

Successful licensees will also be required to list their banks on the stock exchanges within 3 years implying some degree of public shareholding. They will also have to put in 25% of their branches in rural areas that don’t have banks yet. This is a condition that is likely to prove lucrative as long as the new private banks know how to simultaneously do business with the base of the pyramid. A kind of “nano”, “micro” or “grameen” banking if you will. The Sahara Parivar owes at least some of its billions to what they call “para-banking” at the grassroots level.

Private entities would be keen on the opportunity principally to access cheap retail funds and the possibility of maximising profit by lending to the best class of borrowers. So here comes Reliance, Tata, L&T, Mahindra-already in it with Kotak, and probably a host of others including, we are told, brokers and builders.

 But let us remember also that all is not well with Indian banking. Non-performing assets (NPAs) are ruling at a record high. They are up over 50% year- on- year in the PSU banks at nearly Rs. 100,000 crores.

Private Banks tend to merge with others of their ilk when they start to go belly up. The existing clutch of private banks licensed mostly in 1993-94, provide quite a few examples. It is basically down to the big three of HDFC, ICICI and Axis presently.  A dozen were licensed, including the new Kotak Mahindra and Yes Bank, as of 2003-04.

And then there are the foreign banks, led by Standard Chartered. The foreign banks have done quite well with NPAs, if not with their own risky investment and treasury management decisions. But not so well with fraud. And banking fraud too has gone up about 42% and accounts for over Rs. 52 crores gone walkabout this year.

The state of our legal system, burdened and clogged by millions upon millions of pending cases, means that the perpetrators of all kinds of financial skulduggery will not come to pay for their sins in less than twenty years at a minimum. And that is only when the prosecution can construct a strong enough case and persist with it.

Actually, reform in one area cannot operate in isolation and is often bottle-necked by unfavourable conditions obtaining in another part of the system. And it is not advisable to modernise on the back of a sea of Government debt.

Our Government borrows massively, but mostly for current expenditure, salaries for its army of unsackable employees, rather than development.  No country with our frustratingly bad administration deserves to carry such a huge Government on its groaning back.

And even if we did put the borrowed money to development, it is probably the wrong method of financing growth. Our erstwhile colonisers, Great Britain, have just lost their AAA rating and now enjoy AA1; a notch less.

This is probably undeserved too, because Britain owes over a trillion pounds sterling, some 70% of GDP at present. Under the Conservatives, the UK is putting in spending cuts of 50 million pounds this year, but it is still not much when the projection is that by 2016 their debt pile will have grown to 96% of GDP.

No, we are much better served to attract FDI and FII to finance our growth and it is high time we realised it. Banking; bigger, better, and more numerous, can surely do its bit.

(786 words)

February 23^rd, 2013

Gautam Mukherjee