A New Dawn for Banking?
In today's Finshots, we talk about recommendations from the Internal Working Group on licensing and other matters.
The Story
The banking sector is in a rut. Public Sector Banks are too big, too slow or too crippled. Private banks are few and far between. Unpaid loans continue to pile up and the RBI hasn’t offered new banking licenses since 2014. So there’s been some discussion on how we could foster growth and competition in the banking sector while still ensuring the whole thing doesn’t go belly up. And on Friday, an internal working group set up by the RBI offered its recommendations on how we could tweak existing regulations to achieve this objective. And they had some very interesting propositions.
For starters, the committee believes it's time we start offering some large corporate/industrial houses full commercial banking licenses. That means any business group with assets over 5000 crores, where the non-financial businesses account for more than 40% of the total assets. Think — Tata’s and Birla’s. The hope is that once they are offered a full banking license they can bring lots of money, lots of experience and lots of brand value to the table and help grow the ecosystem. But that’s not all. The committee also proposed we look at large, well-run non-banking financial companies or NBFCs who have been operational for 10 years with an asset size of over 50,000 crores. Maybe it's time we offer a commercial banking license to these guys as well.
Because as it stands, NBFCs might look and feel like banks, but they can’t do a lot of things full-fledged commercial banks do on a regular basis. So the growth potential is limited. However, if they can seamlessly transition into a commercial bank, then the sky is the limit. Or at least, that’s what most people believe.
But licensing is a tricky business. Consider, for instance, what happened in 1993, when the government finally decided to open up the banking sector to private enterprises. Out of the ten licenses granted in the first round during 1993–94, four were promoted by financial institutions, three by individual banking professionals, one was a co-operative bank, one more an NBFC and finally there was an established media house in the mix. If you’re wondering what media house that was. Well, it was the Times Group.
Anyway, almost three decades on, only 6 of the original 10 banks still exist. The three banks floated by banking professionals all had to merge with other private sector banks. One infamous case involved Ramesh Gelli — a banking executive who promoted the Global Trust Bank. After showing some promise initially, the bank was caught up in the Ketan Parekh Scam, after having lent large sums of money to speculators in the stock market and then suffering massive losses when the markets took a tumble. Eventually, they were forced to merge with the Oriental Bank of Commerce. Also, the Times Group decided to walk out of the banking business after merging with HDFC Bank in February 2000.
The point is — More licenses don’t always equate to better prospects. So it’s always imperative to be prudent. Which is why the group recommends that new banking licenses be offered to large corporates only after the supervisory wing of RBI is thoroughly strengthened and laws are amended.
Also, there was another interesting recommendation that could open up new doors for the likes of Paytm, Fino, and Bharti Airtel. The internal working group suggested that payment banks be allowed to convert to Small Finance Banks after three successful years of operation instead of the current stipulation of 5+ years. And if you’re unfamiliar with Small Finance Banks, think of these as special kinds of banks. Unlike conventional banks, small finance banks are expected to stick to a very specific mandate, i.e. they have to operate at least 25% of their banking outlets in unbanked rural areas and 50% of their loans have to be limited to sizes< 25 lakhs. There are other restrictions as well. But these are the more important ones. However, the bottom line here is — If you’re a Small Finance Bank you can do a lot more than a Payments bank. So that’s interesting as well.
Anyway, hopefully, these new proposals eventually translate into official guidelines and aid the recovery of the banking sector.
Until then…