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Photo: Mint

Business houses could help revitalize banking

Arguments against letting big corporate houses into this ailing sector are easily outweighed by its potentially positive impact on competition, efficiency and tech-orientation. Open it up

In a set of proposals that can potentially alter the landscape of financial services in India for the better, a central bank panel last week recommended letting large corporate houses either open commercial banks or convert their existing non-bank financial companies (NBFCs) into the same. Barred from the sector since India’s 1969 policy of bank nationalization, which saw the government taking over private lenders all the way till 1980, business conglomerates like the Tata, Bajaj and Aditya Birla groups might be allowed back into what is now an ailing state-dominated market in acute need of a shake-up. The entry path for such big names could be eased by the panel’s proposed tweaks of equity dilution norms. Compliance timelines might be relaxed and bank promoters would need to reduce their stake within 15 years to just 26%, instead of the current cap of 15%. With the equity holding of other investors to be capped at 15%, new principals would be assured a fair degree of control over the banks they set up. Apart from NBFCs with assets above 50,000 crore in operation for at least a decade being made eligible for bank licences, online payment banks with a record of over three years, like Paytm and Airtel, may be allowed to turn into small finance banks. Should the panel’s proposals be adopted and the field opened up, it could enhance the field’s competitive intensity, spur performance and revitalize our credit market. In turn, if this spells greater efficiency in capital allocation overall, it could do our economy a good turn over the years ahead.

The Reserve Bank of India (RBI) has held the new proposals out for feedback till 15 January. Letting business houses into banking is an idea that has been knocking around for more than a decade. The hesitation so far was principally over the prospect of a private-sector version of crony lending arising from incestuous webs of business relationships, which could result in excessive risk concentration. A bank held too closely would be especially vulnerable to that problem, so any entrant’s shares should ideally be held by a wide set of owners, eventually, but not so widely as to deter market entry. The RBI panel’s proposed pattern of share-holding seems designed to strike a balance. Together with the use of holding companies as a device to keep business houses at arm’s length from their banks, the scope for conflict-of-interest hazards would be outweighed by the idea’s benefits. RBI must keep watch, of course.

Globally, banking appears to be on the verge of a technology-led transformation. US-based Big Tech firms such as Google and Apple are reported to have drawn up plans to offer financial services over the internet. While their game for now may be to forge alliances with banks and act as front-end extenders of loans, the strength of their consumer interface, internal algorithms and capital reserves might already have put them in a position to supplant classic high-cost banks with low-cost digital equivalents. India has its share of ambitious fintech players, too. While bank regulation will likely adjust only slowly in response to such a major shift, given our need for broad sectoral stability, lenders may need to adapt at warp speed anyway. This would also lend urgency to the cause of getting our public sector banks to shape up. Some of them should be privatized, gradually, even as the rest are distanced from central control through the extra layer of a holding company. This could be done in tandem with the lowering of entry barriers to the arena. The country can’t afford the burden of poor-quality financial intermediation much longer.

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