Is he a fit and proper person to run a bank? This is literally the billion rupee question that former RBI Governor Bimal Jalan and his colleagues on the committee to recommend new banking licences must face as they struggle through the numerous applications to open banks.
A scion of India’s biggest business house was unbelievably frank. Says he, “Give me a banking licence and my group’s debt will come down by Rs 15,000 crore.” Reeling, as he is reported to be, in a mountain of debt, it’s easy to understand his desperation, to the point that he doesn’t realise the import of his utterance.
Objectives vs motives
The objectives of licensing new private banks haven’t gone beyond the generality of hoping they make banking more ‘inclusive’. But objectives are vastly different from motives — the former are for public consumption while the latter is the hidden reality. To hope all private banks with their profit, or worse, private agendas, to drive ‘inclusive banking’ is a joke. And one’s certain a man of Jalan’s experience knows this only too well. Still, he has a mandate to be fulfilled as best as he can.
Broadly, applicants can be put into one of three categories. Many would just be interested in investment banks and related wholesale activities.
The second would consist of NBFCs interested in bank conversion and include existing micro-finance institutions. The rest are unlikely to be ‘legit’. This classification will prevent ‘adverse selection’.
The investment banking model itself has two sub-species. One consists of banks which sprung from term-lending institutions and the UTI. They have large branch networks and managed to capture a lot of ‘creamy layer’ business. Their biggest achievement is giving Government banks a run for the money in technology and customer service. Add their ‘savvy’ approach, the numerous well-paid jobs they have created both for ‘generals’ and ‘soldiers’ and consequential multiplier effects and it’s clear that, overall, they have been net positive for the economy.
Licensing other term-lending institutions for banks cannot cause damage.
The second sub-species simply feeds off cheap money from the money market and arbitrages its way to big profits — more a hedge fund than a bank. Don’t look for ‘inclusive’ banking among such aspirants.
Morphing NBFCs and MFIs to banks will help supply credit to grow existing MSMEs and incubate new ones. The big gap and opportunity lie here and deserves the strongest support.
Along the way, the committee would do well to consider allowing NGO-run banks, recognising the sterling work many are already doing on a totally non-profit basis and whose bona fides are without question — the ‘Grameen’ model, for instance.
Personal benefit
We must be wary of business groups entering banking for personal benefit and eventually dumping an insolvent institution on the RBI.
It’s happened many times earlier. Some of the current applicants have a ‘history’, practically to the level of being ‘history-sheeters’ in the world of finance.
It should be easy for the committee to spot and weed them out.
(The author is a Chennai-based financial consultant.)