The Reserve Bank of India is considering allowing companies to set up new banks as they have already been permitted to operate in other financial services sectors such as insurance and mutual funds, according to Executive Director B. Mahapatra.
They (corporates having non-banking finance companies, insurance companies and mutual funds) are already competing with banks, both on the assets and liabilities side, the RBI ED said in his inaugural address at the National Institute of Bank Management, Pune.
Outlining the main reasons for allowing corporate houses into banking, Mahapatra observed that industrial and business houses have a long history of building and nurturing new businesses in highly regulated sectors such as telecom, power, airports, highways, dams and ports.
“Industrial and business houses can be an important source of capital and can provide management expertise and strategic direction to banks as they have done to a broad range of non-banking companies and other financial companies,” Mahapatra said.
No worry
Equities of large industrial and business houses are widely held and are listed on the stock exchanges and are subject to the Companies Act, Securities and Exchange Board of India rules and regulations on transparency, disclosure and corporate governance.
Mahapatra said permitting industrial and business houses to own a limited number of banks may not lead to undue concentration of control of banking activities as the Indian banking system is largely dominated by public sector banks.
Further, industrial and business houses with presence across various sectors would not like to lose their reputation compared to a pure individual promoter or financial services player.
The RBI is of the view that financial inclusion being the overall objective of the present bank licensing policy, it was considered that industrial houses with deep pockets, could fill the gap, as financial inclusion is a capital and technology intensive project.
Implications
Since the new banks will bring in new business models, products, processes and technologies, the level of productivity, efficiency and customer service would be expected to be higher. The existing banks may have to re-orient some of their businesses and technologies.
Mahapatra was of the view that the existing banks would face competition, both on their assets and liabilities side , from the new generation banks and will have to devise ways to withstand the competition or risk losing their existing customers, who may move away to new banks.
“Banks that cannot compete would be vulnerable to acquisitions/takeover. Possibility of voluntary amalgamation amongst some banks cannot be ruled out,” he said.
The public sector banks as a group have a dominant market share of about 72 per cent. They are likely to shed some weight over time and the share of private sector banks as a group would increase.