PC: I am lost. Finance Minister Pranabda said he wanted to issue more bank licences. Then FM Chidambaram says the Reserve Bank of India must hurry up the job of giving licences. On the other hand, his back office is working overtime to consolidate the sector. Meanwhile, the Reserve Bank says there should be many more banks to increase competition, so that net interest margins of 4% become history. And simultaneously, it is reluctant to issue more bank licences. What’s happening? Do we want more banks or less?
RBI: Both, more or less. See, we want more licences, but less banks. I also heard that 14 microfinance institutions from Hyderabad want licences.
PC: To set up banks?
RBI: No, they want licences. Banks will be an afterthought. In India you covet licences, whether it is for banks or liquor shops. One NBFC promoter who is no longer interested in finance and wants only to sell gulab jamuns does not want to surrender the NBFC licence, because in India it is foolish to surrender any licence.
PC: But why this new-found love for less banks?
RBI: It may be found, but not new. In 2005, Chidambaram whispered “consolidation’ and analysts promptly wrote fat reports on the subject, extolling its virtues. And then the panoply of Financial Services Secretaries, who I have had masala tea with, have all had tables full with presentations on consolidation. They said they were, autonomously, building a consensus on consolidation.
PC: Then why didn’t it happen?
RBI: Do you understand the intricacies of the Indian marriage system?
RBI: You see, in this ritual, the boy’s and girl’s parents would talk and discuss, neighbours and relatives will meet and discuss, but the boy and girl won’t. *
PC: So why didn’t they force a shotgun court marriage?
RBI: They tried to, but the boy and girl never appeared in court, despite summons.
PC: Oh. But you said this keeps happening, so it’s no longer serious.
RBI: No. Once is happenstance, twice is coincidence, thrice is enemy action, thus spake Eric Goldfinger to Mr Bond. They say they are hell-bent on creating larger banks.
PC: So you mean that State Bank of India (SBI) will start rivalling JPMorgan?
RBI: No. It is too much of a waste of time for JPMorgan to attempt that.
PC: Excuse me, you mean that it is not worth the while for SBI to emulate JPMorgan, right?
RBI: Nah. Let me be explicit. JPMorgan is covered by 27 analysts, and SBI by 67. SBI is already bigger than JPMorgan.
PC: Are you sure?
RBI: Indeed. But I checked that on Bloomberg a month ago. Things may have changed slightly after that. Brokerage firms are going bust all the time in the US. They don’t go bust in India. So SBI’s coverage may have increased, and JPMorgan’s down. See how size matters?
PC: I sort of think I see. So that’s why there’s no point in creating larger banks, and Chidambaram wants more licences to create more banks?
RBI: No, don’t go round and round. I meant he wants less banks, more or less.
PC: Yes, but why???
RBI: What’s the point in maintaining a large army with no generals? Between you and me, this is the problem—he is finding it tough to run armies. Big shortage of generals.
PC: I admit I am already battle-weary, listening to you. Please elucidate.
RBI: The FM is exhausted trying to find leaders for banks. On top of that, the regulator wants to introduce fit and proper criteria for them, so more headaches. That’s the real reason.
PC: But then banks will become too big to fail.
RBI: Ha ha ha ha. Big or small, they don’t fail. We don’t celebrate failure, it’s a stigma. We have even stopped failing students in school, where is the question of banks failing?
PC: Ok, so the regulator wants to countervail by wanting more banks.
RBI: Both, more or less. They are upset with some small weak banks, so they want less of them. They want more for financial inclusion. But less of business houses owning banks to avert conflict of interest, but more of them because who else will put in Rs.500 crore? Less of public sector—they want to avoid avoidable confrontation with the government. More of public sector, for financial stability. Less of...look, I am feeling thirsty, let’s head for the water cooler.
PS: Disclosure u/s 66A of the Information Technology Act - PC stands for Plainly Confused and RBI for Reliable But Intriguing. This is a work of non-fiction. Any resemblance to an individual, real or imagined, is purely intentional.
* Apologies to K.C. Chakraborty for lifting his lines.
Dipankar Choudhury has been a senior research analyst on financial services as well as other sectors at various investment banks, and is currently an independent consultant focusing on banks and financial services.