Home / Markets / Mark To Market /  India needs big promoter-led banks, and the RBI needs sharp sleuths to oversee them

India’s banking regulator seems to have tuned into American singer Bob Dylan’s The Times They Are A-Changin yet again.

In a span of a week, the Reserve Bank of India (RBI) has not only allowed a foreign bank to buy a private sector bank and, thereby, gain more footprint in India, but is now also thinking of opening the gates of banking to big conglomerates. What’s more, the major non-banking financial companies (NBFC) should turn themselves into mainstream banks.

These are two of the many recommendations made by an internal working group. To be sure, these recommendations have been made in the past, too. But RBI has so far avoided being too lenient on giving out banking licences. In the last round of universal bank licensing six years ago, only two candidates made the cut, and none of them were big conglomerates.

Stymied by capital
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Stymied by capital

However, analysts said this time RBI may indeed warm up to the idea. The rationale is simple. The Indian economy needs big banks promoted by deep-pocketed entities that can easily finance the needs of the economy. “For a capital-starved banking sector, the only way is to tap domestic promoters to grow. I think some of the recommendations are path breaking if adopted," said Abizer Diwanji, partner and national leader, financial services, EY. Diwanji said RBI may first allow big NBFCs to get banking licences. Such lenders already have the track record needed. Some of them also have robust processes that rival those of banks. “We need large-scale lending in India and NBFCs turning into banks will help this," added Diwanji. Analysts said that NBFC shares may gain although these are just recommendations and not rules yet.

While RBI may be soft on NBFCs, it may be tough on giving licences to big conglomerates. To be sure, the working group has recommended that licences be given only after the Banking Regulation Act 1949 is suitably amended. This may take time. Also, the complex structure of large conglomerates makes it difficult for RBI to oversee them. “Big corporates getting licences may not be soon because RBI will want to first ensure governance structures and supervisory rigour," said Diwanji.

This rigour has come under question. While RBI has tightened regulations enough to avoid nasty surprises, its supervisors have not been able to fish out dodgy transactions. Within two years, two large NBFCs and three banks have gone under. In the end, the regulator has been blamed for either waiting too long to rescue a bank or completely missing the problem. But the central bank has begun to plug the holes. In the past few months, it has built a separate cadre of supervisors and also beefed up training.

Big conglomerates and NBFCs may find themselves closer to get a bank licence, but RBI won’t give in until it has all the shields in place.

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