BackWhy two licences is all that we could have expected
The process of issuing new banking licences could have been handled with greater clarity and transparency
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So the banking licence affair was a damp squib, we are told. Or else why should there be three years of nail-biting suspense and only two licences? One acquaintance even recalled the comment of a senior diplomat about India’s foreign policy to which he likened the bank licencing drama—“like the lovemaking of an elephant: it is conducted at a very high level, accompanied by much bellowing, and the results are not known for two years" (quoted by Shashi Tharoor in Pax Indica).
Perhaps we need 50 licences, perhaps not, but in any case the above assessment is a patent misreading of ground realities.
Banking licences are not a simple regulatory matter decided within the four walls of the Reserve Bank of India (RBI), unlike, say, a circular sent to banks to increase provisions on restructured assets. And RBI knows it acutely. More so the governor, who has had an association with the central government.
It is a political hot potato not the least because it has been episodic (once in 10 years, now sought to be changed) but it is awarded free of cost—unlike a telecom licence—and quite a few of the earlier licencees have demonstrated that it is an immensely profitable business, despite the onerous conditions that a licence comes with.
So in an election year when accusations of favours to big businesses are flying thick and fast and the market is abuzz with going rates for bank licences, RBI cannot possibly be faulted for its restraint. However, this over-the-top caution—to the point of seeking a go-ahead from the Election Commission—could have been minimised had the RBI and the government, against their wisdom, made the process totally transparent. Not doing so for the distribution of a free resource is inviting trouble, such as the next government raking up this issue.
Even this degree of caution does not serve its purpose and is open to backfiring. How, for example, is IDFC Ltd safer, or more fit and proper than L&T Finance Holdings Ltd, let alone being more eligible? Why Bandhan Financial Services Pvt. Ltd and not Janalakshmi Financial Services Pvt. Ltd? Why should answers to these questions be classified information?
The key problem has been that entities in this exercise, working at cross-purposes, have muddied the waters and tied themselves up in knots over objectives and implementation. It all started with the then finance minister Pranab Mukherjee’s 2010 budget statement that articulated the need for more licences to foster financial inclusion. This author has always argued that giving more licences to achieve financial inclusion is a shambolic proposition. Actually the objective should have been loosening of market concentration that has increased over the years with several banks getting swallowed by others. But whether financial inclusion or more competition, two licences are mere apologies.
Those who feel that RBI’s opposition to the government’s purported support to business houses owning banks miss the point that RBI has been viscerally opposed to more licences in general (not just to industrial houses), though it has been careful not to openly express that. The reason is that the litany of scare stories in this sector has not ebbed. Banks owned by industrial houses going bust may now be a part of the pre-nationalisation folklore, but even later we have had Nedungadi Bank Ltd and Global Trust Bank Ltd bailouts, as also examples such as Centurion Bank Ltd that teetered on the brink. We are not finished—as we speak, United Bank of India makes news for the wrong reasons and Dhanlaxmi Bank Ltd is seriously troubled—in an era of vastly improved regulation.
What has markedly complicated matters and on which very little commentary has taken place, is the fact that in this cycle, RBI’s main concern has been the health of public sector banks—the putative epitome of safety. With already a Bharatiya Mahila Bank Ltd set up for a purpose that no one quite understands, and an India Post Bank that can technically be set up without an RBI licence, it is understandable that the banking regulator has to formulate an anticipatory budget for pain relievers even before shouldering the burden for more licences.
It is easy to blame RBI for using the safety pretext and issue few licencing to hide its own lack of regulatory capacity or acumen. To some extent the barb may also be justified, but my sympathies are with it as it too observe how a Sahara Group is able to cock a snook at a regulator as well as courts. It is normal for RBI to presume that among the new licencees, it may have to deal with a problem child down the line, with limited powers to admonish it.
The signal from RBI is abundantly clear. Using the learning from the current licencing for more licences in future or working on differentiated licences are very refined dilatory strategies. The former means there will be no action for 18 months (life of the current in-principle approvals) and the latter is somewhat doubtful until legal amendments are put in place, a process that in general has become a challenging ask.
The author 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.
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