The brouhaha on licensing new banks is in full flow. The RBI has announced guidelines for applicants. In a few weeks we will know the response.

Objectively speaking, there’s no room for more banks. And our experience with the new generation private sector banks in the aftermath of liberalisation is nothing to rave about. Just three of them survive.

Some were bought out and one went bust forcing a merger with one of the much derided government banks. A high profile survivor got into such horrendous asset-liability mismatches (after much boasting of its ‘risk management’ skills) that it had to be rescued with liquidity support from the RBI and the very government banks it made fun of earlier.

That Government favours more banks is not surprising. It’s easy to show action in the financial sector. No hard work, sweat as in the real economy. So the mantras are new banks, pension and insurance ‘reforms’. One wishes there is a magic wand to instantaneously grant our policymakers all that they want on these fronts. At least we will then be spared the excuse that growth suffers because we couldn’t implement ‘financial reforms’.

As a matter of fact, even the viability of a properly-run new bank is suspect. The RBI-mandated cash reserve earns no interest and the yields on investment in government bonds (24 per cent of deposits) do not cover the cost of deposits. Besides, there is the priority sector lending obligation of 40 per cent. The strange justification for more banks is that they will reach out to un-banked areas and make it more inclusive, while expanding credit to micro and small businesses. Talk to any private sector or foreign banker and their first complaint is that the lending compulsions to the priority sector are a millstone around their necks, but for which their profitability would be much better.

Neither do they have any enthusiasm for small businesses relationships. Their focus, and rightly so, is on the low-hanging fruits of investment banking and the creamy layers of high net worth individuals and private banking.

The biggest issue is promoter integrity. The number of Indian business houses with clean hands can easily be counted on the fingers of a single hand. One shudders to think of banks in the hands of those involved in violations of the financial laws of the country. The Economist of London has already carried an article on the ‘cost’ of getting an Indian banking licence. Such is the global reputation of India’s decision-makers.

In any case, as is well known, bank promoters have a free ‘put’ option. If a bank succeeds, glory to them; if it fails, the RBI is there to pick up the pieces. So mis-governance is cost and punishment free. Who wouldn’t jump at the opportunity?

Three private banks are already in the news apparently for flouting ‘know-your-customer’ norms.

Kind of, the more the merrier.

(The author is a Chennai-based financial consultant.)

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