The Indian Banking is going through a metamorphosis. Besides combating the apparent economic languor, banks are finding it difficult to manage the barrage of bad loans. Banking industry has always been an integral part of the Indian economy and to see such poor governance and operational nomenclature seems to raise a multitude of concerns. While one takes time to process all this, Reserve Bank of India (RBI) has come up with an untimely suggestion. The Internal Working Group (IWG) set up by RBI has made a recommendation that shall allow Indian corporations to own banking licenses. To be specific, group entities possessing total assets to the proximity of INR 5000 crore or more, with the non-financial business accounting for more than 40% of total assets or gross income.
There are a whole host of issues that could crop up if the recommendation is realized. Before we get into the details, let us first understand the basics. For the uninitiated, Indian corporations that do not have any business vertical catering to financial services can at most apply for a Non-Banking Financial Company (NBFC) license but not for a full-fledged bank. Now, what are the problems that we are likely to encounter?
Firstly, concentration of power and this is a no-brainer. In a socialistic nation like ours, the last thing we would want to have is a handful of folks controlling the lives of many. Albeit, many of the policy-makers do not see this happening but unfortunately this is inevitable. Not only will this tarnish the social fabric of the country, but will also pave the way for economic mis-happenings.
Secondly, the interlinkage between such group entities shall be a threat to corporate governance. Imagine how easy it would be for a group entity to procure loans from the quasi-home bank. This connected lending mechanism can prove to be a death bed for the already sulking banking space. Even if one buys the argument of the presence of an independent regulator, to locate the black hole will not be viable, given the complex group structure.
Thirdly, it might culminate into a situation of too many cooks spoiling the broth. For a non-inclusionary economy like ours, having a crowded banking space is far from favorable. While one would like to believe that a large number of players mean varied options and thus better service, except more often than not, it’s untrue. The problem with the industry does not lie with the unavailability of services, it lies with the yawning disparity of status such services are catering to.
It is imperative for the policy-makers of this country to foresee consequences relating to any move they wish to make. There is no denying that the banking space needs an external agent to pump life into it, but that has to happen in sync with the interests of the citizenry. There lie countless mechanisms through which both the RBI and GOI can go about taking care of the economic activities. In my view, regulators must aggressively encourage Small Finance Banks (SFCs) and NBFCs to work efficiently and make them believe that they can turn into a full-fledged banking player. It is worrisome to see the fragile condition of Indian banks, along with the credit de-growth in recent times. This is the time for us to focus on quality rather than quantity. If we want to progress as a nation, we need to bear in mind that regulation is easy to ape, innovation is not. Let’s push for innovation.
Written by- Shyam Agarwal
Literary Sources:
? The Economic Times;
? Bloomberg Quint.
Image Source:
? Indialegallive.com
