Piggy Bank Wearing A Surgical Mask

In 2016, Jio entered the country’s telecom sector. Unlike other business startups, the company had abundant finances to support not just its expensive telecom infrastructure and license but also to offer deep discounts at its own cost to topple the market. As per March 2020 statistics, Jio Infocomm holds more than 50% of the telecom market – a feat that it has achieved within a period of four years, in a sector which ain’t funny.  Besides, disruption caused by Jio led to the exit of various other service providers who could not survive the competition, leaving the country’s telecom network at the hands of a few mighty corporates and corporate houses. Some might take pride in having one of the richest billionarie of the world from our country, however, the standard of living of the balance billion people explains the income disparity in our country. If a company led by one family can disrupt the entire telecom sector of a country, can we have a peaceful night sleep, if our money is held by these same people?

Over the past few years, we have seen many co-operative banks collapse. The Non-Performing Assets (NPAs) are piling, bad loans have become a trend and scams have exposed the corruption in our banking system. Meanwhile, India is turning digital. The growth in digital transactions has been unprecedented in the past decade. Thus, our banking system needs to be strengthened for the economy to stay stable over time. So thought the Government and Reserve Bank of India. Thus, the RBI constituted an Internal Working Group (IWG) on June 12, 2020, to review existing guidelines and corporate structure of the Indian banking system. The IWG came up with the following recommendations:

  1. The cap on the promoters’ stake in the long run (15 years) be raised from 15 per cent to 26 per cent of the paid-up voting equity capital
  2. A uniform cap of 15 percent of the paid-up voting equity capital for non-promoters
  3. Large corporate/industrial houses are allowed as promoters of banks after necessary amendments to the Banking Regulation Act, 1949 (to prevent connected lending and cross exposures between banks)
  4. Well-run large Non-banking Financial Companies (NBFCs), with asset size of INR 50,000 crore and above be considered for conversion into banks after completion of 10 years of operations and due diligence.
  5. For payments banks intending to convert to Small Finance Bank, three years of experience as Payments Bank be considered sufficient.
  6. Small Finance Banks and Payments Banks be listed within 6 years from the date of reaching networth equal to prevalent entry capital requirement for banks or 10 years from the commencement of bank, whichever is earlier.
  7. Minimum initial capital requirement for licensing new banks to be enhanced from INR 500 crore to INR 1,000 crore for banks, and from INR 200 crore to INR 300 crore for small finance banks.
  8. Non-operative Financial Holding Company (NOFHC) should continue to be the preferred structure for all new licenses.
  9. Once the NOFHC structure attains a tax-neutral status, all banks licensed before 2013 to move to the NOFHC structure within 5 years from the announcement of tax-neutrality.
  10. Concerns about banks undertaking different activities through Subsidiaries/Joint Ventures/Associates be addressed through suitable regulations.
  11. Take steps to harmonize and bring uniformity in different licensing guidelines

The report with the above recommendations has been placed on the RBI website for comments of stakeholders and members of the public. However, the move has already publicly received flakes from all directions.

Why the recommendations are expected to hurt more than benefit?

Former RBI Governor Raghuram Rajan and Deputy Governor Viral Acharya have listed two key reasons why corporates should not be allowed to into the banking sector:

  1. Risky Lending – According to Raghuram Rajan, Corporates can get lending without any questions asked by an in-house bank e.g. Reliance Bank financing Reliance Jio. While the Government may place an independent working committee to handle the operations, it would still be incapable of covering the loophole. Besides, if corporates handle the finance of the country, they may put political pressure on the central bank. According to the duo, if sound regulation and supervision were a complete solution to the entire problem, India would have never had a bad loan problem.
  2. The concentration of Power – It’s pretty straightforward that the banks with corporate promoters can easily concentrate economic and political powers and exploit the same. Viral Acharya highlighted instances of promoters turning rogue after receiving the license, owing to self-lending opportunities. Money power would gain more importance in politics and make the country fall to authoritarian cronyism, according to the duo.

Why does the timing of the proposal feel fishy?

There hasn’t been any major change in the banking system of the country – problems which have unearthed now have been known for a while. Forming an Internal Working Group (IWG) out of blue, especially when a major corporate house in the country is making big moves, places the entire move under question. At present corporates can setup a payments bank in India e.g. Paytm, Airtel, etc already have their payments bank in functioning. The need for extending full banking licenses to the corporate houses is unprecedented and clearly without need.

Rating agency S&P Global has also commented that it is skeptical of the move, given India’s weak corporate governance and corporate defaults. R Gandhi, former Deputy Governor of Reserve Bank of India has also raised concerns over the move if the money collected by such banks will be diverted to the benefit of the corporate house. It is important to ringfence the promoter from the operations of the bank.

Converting NBFCs into Banks

Around half of the finance companies with assets over INR 50,000 crore meet the criteria for conversion into full banks. Amongst the top 10 finance companies, Aditya Birla Capital, Bajaj Finance, L&T Finance Holdings, Mahindra Finance, Piramal and Tata Capital are already part of a corporate house. HDFC, LIC, PNB already have finance companies as well as banks in their group. However, a big challenge for the NBFCs is to maintain a high statutory liquidity ratio of 18% and the cash reserve ratio of 4% which not all non-banking companies would be happily able to maintain.

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