Banks again in focus

At a time when banks are working hard to navigate the Covid-induced crisis with minimum impact on their financial health, a Reserve Bank of India (RBI) working group on Friday (November 20) vomited a series of recommendations including the most controversial proposal to allow corporate houses to set up banks. The panel has also suggested that large non-bank lenders with asset sizes of more than ₹50,000 crore, including those owned by corporates, should be considered for conversion into banks, provided they have completed 10 years of operation. The panel also recommended that payments banks can convert into small finance banks after three years of operations.

Notably, among other things raising the cap on promoter stake in private sector banks to 26% of the paid-up equity after 15 years of operation also formed part of its recommendations. Existing norms mandate private bank promoters to cut their ownership to 40% within three years and to 15% in 15 years.

The panel stated that  bringing down the promoter holding to below 26% any time after the first five years of lock-in. For non-promoter shareholding, the current long-run shareholding guidelines may be replaced by a simple cap of 15% of the paid-up voting equity share capital of the bank.

Even as former bigwigs of the RBI and banking experts were quick to denounce the proposal of allowing corporate houses to own banks, the general public may have also got attentive to the issue and would be fearing for the safety of the banking system. The immediate reaction to this move visualizes corporate houses’ control of financial sector of this magnitude be as good as dictatorship. The general public has already been experiencing the heat of corporate control in other sectors. It’s worth mentioning that these corporates have tailored their operations in such a way where consumers have negligible say in a transaction and have to submit to the writ of these powerful business houses.

Rolling out such a recommendation allowing most influential business houses to own banks at this juncture when Covid crisis refuses to fade away and even future is uncertain whether the infection would be successfully controlled or not, is only going to derail the current efforts of the banks to bear the impact. Contrary to this recommendation, it would have been in the fitness of things to roll out customized measures to strengthening the existing network of banks in the country.

By now all of us are aware that the journey of banks during the ongoing Covid crisis has not been easy at all, where past (pre-Covid period) has been very challenging in terms of dwindling businesses and maintaining quality of assets. Present is very woeful and future uncertain. To arrest the spread of the infection, several mitigation strategies based on social distancing, national quarantines, and shutdown of non-essential businesses were rolled out by the government. The economic lockdown was a huge shock to the corporate sector and their revenues witnessed a steep fall. They had to scramble for cash to cover operating costs. In this situation, banks’ operations became pivotal to play a key role in absorbing the shock by lending to the businesses to stay afloat in business terms.

Notably, we witnessed wide range of policy interventions by the government and the regulators to lend financial support to the businesses under these unprecedented circumstances. The policy interventions included the measures aimed to pull out businesses out of sharp tightening of financial conditions in the short term. We also saw measures taken by the government and the regulators to support the flow of credit to businesses, either through government- sponsored credit lines and liability guarantees or by relaxing banks’ constraints on the use of capital buffers.

While falling in line with these emergency operations, the banking sector stand exposed to a host of risks with a series of implications for its future resilience. Lending support to this view, experts say: “As lenders exhaust their existing buffers, they might also experience deterioration of asset quality, threatening the systems’ stability. As the crisis is expected to continue, even after the lockdowns are lifted and economies start to reopen, the net effect of these policy measures on the banking sector is largely unknown.”

Meanwhile, the first thing that comes to a common man’s mind about the RBI panel suggesting to give banking licenses to big industrial houses, is that the move is tailored to let big corporates like Aditya Birla group, the Tata group, Reliance Industries Ltd etc to apply for banking licenses.

The recommendations, if given nod, will also pave way for Bajaj Finance Ltd, L&T Finance Holdings Ltd, Shriram Transport Finance Ltd, Tata Capital Ltd and Mahindra and Mahindra Financial Services Ltd for obtaining banking licenses. The suggestion to convert payments banks into small finance banks has potential beneficiaries in Paytm, Jio and Airtel payments banks.

However, counter narrative too is picking pace as potential beneficiaries of the proposed move call the suggestions ‘progressive, practical and protective of all stakeholders’ interests.’ They call it as a move which can play a key role in bringing the benefits of banking and economy to the underserved and newer segments. But the counter narrative is dished out by the potential beneficiaries and independent experts of international repute call it a ‘disastrous move’ where lenders will also be borrowers.

Opposition to the idea of allowing industrial houses to own bank licenses by the former Reserve Bank of India (RBI) Governor Raghuram Rajan and his then deputy Viral Acharya is already making headlines, which has gained public attention. Calling it “disastrous”, these two most trusted banking experts have argued that allowing corporate houses entry into the banking system could intensify the concentration of political and economic power in the hands of a few business houses.

“The history of such connected lending is invariably disastrous – how can the bank make good loans when it is owned by the borrower?,” they argued in an article posted on the former’s LinkedIn page.

“Highly indebted and politically connected business houses will have the greatest incentive and ability to push for licenses. That will increase the importance of money power yet more in our politics, and make us more likely to succumb to authoritarian cronyism,” they added.

Both the experts also argued against shrinking the conversion time for payment banks to convert into the banks. In the last payments bank run by Paytm and Reliance Jio have expressed interest to convert into a small finance bank.
“A second possibility is that an industrial house holding a payment bank license wants to transform into a bank,” they said. “One recommendation of the internal working group that is equally hard to understand is to shorten the time for such transformation from five to three years, so perhaps the surprising recommendations have to be read together.”
Remarkably, our banking industry has and continues to fill Covid-induced massive credit gaps in various sectors of economy by offering customers hassle free and greater access to loan facilities. Not only this, the banks have played a crucial role in distributing various governments’ economic packages.

At the moment the situation is ticklish for the banks. Surge in non-performing loans is a growing tension which has direct bearing on their capital. Notably, non-performing loans lead to capital depletion.

Instead of spending time on tailoring bank ownership scheme for influential business houses, it would have better to lend extraordinary support to the existing shape of the banking sector. At present the Covid crisis has made the banking sector very brittle as the surge in bad loans in coming times, whether the pandemic is controlled or not, is inevitable. There is need to respond with extraordinary measures from the regulator to devise out-of-box recovery plans reshaping the sector. The banks need a stronger recovery mechanism without comprising the quality of banker-customer relationship. The regulator needs to handhold banks in serving customers better through the right channels, with dynamic and relevant products and services; adapting to new ways of working; and building more resilient and agile organizations.

In succinct, altering ownership structure of banks won’t help.

(The views are of the author & not the institution he works for)