Prof TT Ram Mohan evaluates the new fancy sounding policy:
Critically evaluating the draft guidelines for “on-tap” bank licences put up by the Reserve Bank of India, it is argued that India’s banking system is already suffi ciently competitive, and there appear to be few who would be willing to enter the banking business. Entry of newer players, especially those with corporate backing, cannot be the priority at the moment. The priority over the next two or three years has to be the resolution of the non-performing assets problem and strengthening of the existing players.
Indian banking policy is highly chatoic as of now. There is no clarity with govt and banking regukator moving in different directions. There is hardly a coherence. On one hand, we are told that we do not need so many banks and hence merging public sector ones. On the other, we are just trying to create new players despite there being no real space in the sector.
Given the current mess and chaos in Indian banking system, new licences and now this “on tap” licencing should be least of priority. But this is obviously not the case. One actually does not understand the ongoing strategy. For universal banks only 2 banks were given licences that too amidst elections (such was the urgency), then we had 11 payment banks out of which three have dropped and 10 small finance banks.
Interestingly, when universal banks were about to be licenced there was talk that 7-8 will be licenced. And we had just two licences in the name of prudence. First corporates were allowed to be bid for universal bank licences and then excluded from the list without any reason. The same corporates were then given entries in payment banks (and this was called competition again) and there are already jitters with three dropping out.
And now the banking licencor (we think licence raj has ended huh?) has come out with guidelines where universal bank licences will be available on tap. If they think that there is more scope for new players to apply for universal banks, why did it not issue the same two years ago? At that time it was all about prudence and keeping corporates out of banking. In all likelihood same set of players will apply for U-bank as well? Have they suddenly become eligible? I mean what has changed for a move as early as this?
And of course, the regulator is not really bothered about the experiences of the 2 banks that got the licence. Banking is a really tough business and more banks do not mean more banking. Only Bandhan is trying its bit and IDFC which was expected to transition has a long way to go. Infact after pushing IDFC into retail banking, we now want new banks to lend to infrastructure!
We keep going in circles just to keep the reform noise going to keep the media and markets happy:
The problem is not just the dangers of interconnected lending and their implications for financial stability. It is that large corporate houses, with their strong links to the political class, may not be entirely amenable to the sort of stringent regulation and supervision one associates with the RBI. There is every danger that, in any conflict between the RBI and a corporate entity, the former will lose out. The RBI’s enviable standing as a regulator will be undermined as a result.
Nor is there any compelling need to allow corporate houses to enter in one form or another. First, there is adequate competition in Indian banking today. The share of PSBs in assets has been falling over the years even as private banks have gained ground. On some estimates, the share is expected to fall from around 70% today to 60% in a decade from now. It is fair to suggest that this pace of growth of market share of private banks is consistent with improving efficiency in banking while maintaining stability.
Second, there is a contradiction in saying that we need more competition in banking even while arguing for consolidation of PSBs. This contradiction could be resolved by saying that more competition means the share of PSBs must shrink more rapidly than it is at present. This proposition can be questioned given the general state of governance in the private sector, it is not clear that we gain by accelerating the increase in private banks’ market share.
But if this is indeed the RBI’s position, it must state it explicitly and throw up the issue for political debate. Remember, if there is one issue on which there is consensus across the political spectrum, it is on the need to retain the pre-eminence of PSBs in the banking sector.
Third, banking is in a highly stressed state today and the stresses are to be found amongst both PSBs and private banks. The priority over the next two or three years has to be the resolution of the non-performing assets problem and strengthening of the existing players. Entry of newer players, especially those with corporate backing, cannot be the priority at the moment.
Hastening towards the multi-tier structure—with three or four large international banks, a few national players, regional players and local players—advocated by the Narasimham committee cannot be a priority either. In the present condition of the PSBs, saddling them with the formidable challenges of managing mergers just does not make sense.
In sum, “on-tap” licensing may sound very appealing; it has just the right reformist air about it. It would be more prudent, however, to resolve the serious issues in banking today before thinking of shaking up the system in the name of more “reforms.”