Imagine the excitement of a child on being told that (s)he is going on a holiday to a favourite destination. Such was the feeling in many a quarters as the RBI panel’s draft proposal on banking licences was released for public comments recently.

The total size of India’s banking industry is about ₹100-lakh crore ($1.3 trillion). Economists and finance experts broadly agree that with the services sector being a dominant GDP player, we would need to double credit growth (banking sector size) to help achieve the $5-trillion economy the government has targeted.

As a market, the finance sector has proven that high credit growth is possible. However, the jury is still out on whether it was the fast-paced credit growth that increased the banking sector woes in the past few years.

Rationale and euphoria

While increasing the number of banks in the country (without concentration risk) is an economic need the policymakers are looking at, it is too early to be euphoric. Here are a few reasons why:

Some of the current bank owners will surely benefit from the proposed ownership rules about the percentage stake-holding of promoters. So, the euphoria about new licensing should not become a euphemism for many others.

With the debt market being so abysmally shallow, corporates’ borrowings account for a large proportion of exposure of banks and non-banking financial institutions. In this light, unless the proposed banks can be tracked in real time about their exposure to various entities, it would be futile to “cry over spilt milk” after the annual/monthly/quarterly (reluctant) disclosures.

Interconnectedness of our financial system makes a unique and urgent case for “digital real-time consolidated supervision”. For this, we need all the financial regulators to be on the same page on many issues.

And the challenge is how will corporate houses reduce their dependence on the lenders if they need to own a bank? And, will the banking regulator have the ability to track in real-time what’s happening to the debt exposure of a life insurance company to a corporate entity that’s owned by a bank promoter group? If laws are amended to make such an event happen, does this subsume the independence and authority of other financial regulators or do we move to an unified financial regulatory regime?

Payments banks and small finance banks are experiments whose business viability is still to pass the test of sustainable growth. This could give rise to new licence categories to convert non-banks like HFCs into a “mortgage bank” and would allow for balancing ALM (as the tenor of loans in some sectors like housing can be 15 years), stricter regulatory supervision and focussed lending to specific sectors/consumer segments. But looking at the regulatory reluctance so far to recognise the merits of non-banks, it is anyone’s guess on conversion of non-banks to banks. Even if it’s not “if”, it’s still “when?”.

The lending ecosystem today has not just banks, but also NBFCs, HFCs, MFIs and digital entities. They are all governed by the same regulator. Due to their consumer access, some of these non-banks have shown that they can go from “too small to bother about” to “too big to fail” in a short time. To continue ignoring what’s not a problem yet (that these non-banks can grow to a large size), won’t make the issue go away. Bringing them under mainstream and uniform regulations would allow for preserving the financial stability and ensuring adequate consumer protection.

Some of the new age digital lending platforms are here to address the way millennials and the Gen-Z function. These ideas would challenge and even disrupt the way conventional finance (including banking) functions. What is needed is a regulatory system that can understand these and not just simply ban them. It would be useful for the financial services regulators to have a proactive and dynamic tech-digital charter. Any licensing policy or regulation that gets approved must be applicable for the next two decades so that no one participant gets unfair advantage or is disadvantaged. Even if some of those licensees take the regulator to court.

In today’s world, it is important for regulators to track ownership changes through the ultimate-beneficiary route. What stops a bank owner to “park” ownership in friendly PEs or even own a slice of that specific fund in that PE? Or, simply ask a friend to hold a “stake”.

Let’s not get carried away. The RBI does not have an appellate authority. The central bank does not give reasons or feedback if a banking applicant is not granted a licence. So, it is anyone’s guess as to why the applicant did not make the cut. Such an opaque system does injustice to the applicant as rumours or conjectures can run wild consequently.

So, for all the bullishness about the RBI draft regulations, it can simply be a silent way of not granting licence, and rather keeping the corporate lobbies at bay.

The writer is an independent markets commentator


social-fb COMMENT NOW