Corporate banks – idea whose time has come

When Raghuram Rajan and Viral Acharya blast an idea or rip it, it ought to be a very good idea. Indeed, an idea whose time has come.

Rajan was once the Governor of the Reserve Bank of India, and Acharya a Deputy Governor. But, now, neither is in a position of leadership at the RBI or the Indian economy. But their voices are heard keenly, disseminated widely and discussed seriously.

What is the idea that has irked the duo?

An internal working group (IWG) of the RBI has recommended that large corporates and industrial houses may be allowed as “promoters” of banks. The banks here refer to deposit-taking commercial banks. They do not refer to non-depository institutions such as insurance companies, securities firms and investment banks.

The IWG has not suggested the “handing over” of all banking deposits, loan books, human capital, digital and physical infrastructure, and fee-earning businesses to banks that would be someday owned in part by industrial houses.

The IWG has recommended the amendment of the Banking Regulations Act, 1949, to strengthen the supervisory mechanism for large conglomerates. This includes consolidated supervision.

There are so many competent companies and industrial houses that could bring their human capital, managerial experience to India’s banking and financial industry. Should they be denied an opportunity to practice and demonstrate their talents in a free-market economy?

Would it not be right to “let” the savings of India’s citizens do the talking? Would it not be right to “let” the money of India’s corporate, institutional and retail investors do the talking?

Big promoters will not be allowed to establish banks with all the equity owned by them. They will face an ownership ceiling of 26 per cent of the voting stock. The big promoters will need the support and the participation of other potential shareholders.

India should “let” potential shareholders who are not promoters decide if they will bring in the required equity to augment the capital brought in by the big promoters. Moreover, let India’s young human capital decide if it would work for banks that are 26-per cent-owned by industrial houses.

The duo’s apprehensions

Rajan and Acharya are afraid that giving banking licences to industrial houses will vitiate the economic and financial environment.

First the duo rebukes us for not having learned from past failures attributed to the ownership and ownership structure of banks. The duo wants us to do what the past has taught us, not what our future requires.

Second, they have emphasised the need to stick with the existing limits on the ownership of banks’ equity by corporate and industrial houses.

Third, the duo then makes a logically speculative statement and a speculatively logical statement that the 26-per cent ownership by corporate houses and industrial houses would lead to a concentration of economic power.

Fourth, the dominant corporate owners would tap into the loanable funds of the banks they have promoted. They would not have to answer the tough questions other borrowers would normally have to answer.

Fifth, the dominant owner-borrowers would then default. They will not pay interest on the loans. They will not repay the loans.

Sixth, these banks will then be on the edge of failure.

Seventh, these gouged-out, near-failure banks will not be allowed to fail. Public money would be used to rescue these banks.

So, they are suggesting status quo, and that India is not ready for change. Or, will bungle it if tries something else.

Distrust from afar

India’s banking past is a paradox, at once not engendering great trust but often reverence and confidence. Walk into a branch of Canara Bank, you will see the photograph of its founder. So also, at a branch of Indian Overseas Bank. Ergo, with a Syndicate Bank branch. These founders set out boldly and established banks long before 1947. They did what they could do with zeal. They ran their banks well even while other banks failed. Then they were nationalised in 1969, but not because they faced failure through internal fraud and gouging-out.

Though, it is pertinent to note that bank failures are not unique to India. Bank failures, insider play and opportunistic lending are part of the history of Europe and the US.

India has new needs

India needs a new layer, slice, style and segment of banks to complement the “commoditised” public sector banks, the “foreign” banks, the “perfect-but-small” private banks, and the “cooperative” banks. The country has needs that cannot be served satisfactorily by one or more of the four classes of banks. Moreover, India does not have a big market for bonds. There is more. The market for securitisation is neither big nor deep.

The nation’s economic future should not be held back because of the shortage of a new class of promoter-driven, big, smartly-governed private banks. The need is for more HDFC Banks and Kotak Mahindra Banks.

Savers, investors and the human capital in India should be given the chance to decide what is good for them. It is their future. They should not be weighed down by a past that they did not cause. It is their skin; it is their game. This is the essence of opportunity in a free market.

Moreover, they would have the public-sector banks, the foreign banks, the private banks, and the cooperative banks to fill many of their needs. So, the IWG’s recommendations — when implemented — will not cause a vitiation of the economic environment.

The new, big banks will add more spokes and hubs to the economy. This is the beginning of an adventure and an experiment. Savers, investors and the human capital that are here in India will learn how to play the game without losing their skin or their shirts. Let us rewrite IWG as India’s Winning Gambit.

The writer is founder of CreaSakti, an advisory