DO WE REALLY NEED MORE BANKS?

At a time when banks seem to be failing and falling, with RBI needing to step in like the colloquial knight in shining armor, the new proposals from the internal working group of RBI took everyone by surprise. Licenses for new banks while existing ones are struggling?

The proposal permits corporate entry into banking, allowing promoters to keep intact their high stake and allowing NBFCs to get converted into banks. One had thought that NBFCs will lead the gainers pack today, but they are not really there. Instead the gainers are Equitas, Ujjivan, IDFC and J&K Bank.

Does this mean that NBFCs will not be interested? For NBFCs to be eligible to be converted into a bank, they need to, among many other things - Have an asset size of Rs.50,000 crore and above and should have completed at least 10 years of operation. Even if they do meet these criterion, how many would be really interested in meeting with the strict priority sector lending, following the CRR and SLR norms?

There is word on Dalal Street that the likes of Shriram Transport, Mahindra & Mahindra Financial and Bajaj Finance might be the ones most likely to be interested. But will they really be? (Read our Market Gossip column of today to get more insight)

The last time when banking licenses were given out, it was in 2014. Out of 26 aspirants only two were approved – Bandhan Bank and IDFC.

Also, in the current atmosphere where even something like a DHFL or IL& FS could go down, what is the kind of governance we will be dealing with? More so when banks, despite the supposedly strict vigil of RBI, collapse and fail under governance issues.

The underlying truth is that the corporate governance culture in some of the best-run companies are questionable and no where near international standards. Thus in such a scenario, how does one ring fence the non-financial activities of the promoters with that of the bank? It is pretty common sense that the stress in the non-financial activities of the promoter will most certainly spill-over onto the bank. As the Mohanty Panel, rightly said in its report, “The corporate houses may either provide undue credit to their own businesses or may favour lending to their close business associates.”

Yes, issuing banking licenses to NBFCs owned by industrial houses will remain a contentious issue but the lure of allowing promoters stake from the present 15% to 26% bodes well for likes of Kotak Mahindra and IndusInd Bank. But it remains to be seen whether the 26% stake will also bring them equal voting rights or will it remain capped at 15%.

At the end of all this, the underlying question is whether we need so many more banks? Cities and metros are as such flooded with banks and rural India will rarely bank with private sector. You go to places like Kaza in Spiti or Hanle in Ladakh, we still find a PSU ATM or bank; this is even today. So, if licenses are being issued to build “inclusiveness,” that, sadly is not going to happen.

Be it NBFCs or conglomerates, no one is going to lend big time to fund infrastructure – that last mile run will remain the job of the PSUs. So why do we need more banks – for giving more retail loans? It will become an issue of too many banks chasing the same set of people.