No hurry on banking licences for India Inc

Asia's Tech News Daily

No hurry on banking licences for India Inc
© Provided by The Financial Express Moreover, they may have been willing to take over the weak public sector banks that the government wants to privatise simply to get an entry into the sector.

It is reassuring RBI isn’t allowing large conglomerates and business houses into the banking space just yet. India is simply not ready with the necessary supervisory and regulatory framework to accommodate industrial groups in this key sector. As much as we need stricter legislation, we also need businessmen to respect rules; this calls for a change in mindset. At the risk of painting all promoters with the same brush, one is compelled to say India Inc doesn’t inspire confidence it will uphold the ethics needed in the banking sector. In general, companies in India don’t worry themselves unduly about good corporate governance and it is, therefore, somewhat disconcerting to think they would be controlling large sums of public money. While most private sector banks have, no doubt, done well, the landscape has been blotted by the fraud and failure of lenders like Yes Bank and others must always be a lesson for us. Indeed, a good part of the loan losses of Rs 20-25 lakh crore, over the past decade, can be attributed wilful defaulting. It isn’t as though all of this was the doing only of big corporate houses, but, as we have seen in the insolvency courts, there were some big groups that didn’t live up to the standards expected of them. It would be a risk, in the absence of a robust regulatory framework, to entrust public money to large business houses.

There are those who argue big industrial houses would have brought in capital into the sector which could have helped fund projects. Moreover, they may have been willing to take over the weak public sector banks that the government wants to privatise simply to get an entry into the sector. At the right price-and if the government isn’t too rigid about other conditions-banks should find buyers. Indeed, it is just as well the central bank isn’t ready to upgrade NBFCs, owned by corporate houses, to banks. This might seem unfair because many of the well-run NBFCs are the offspring of business houses. However, at this stage, it is prudent to let the NBFCs stay that way; they could be considered as bank-candidates when the environment improves. A higher shareholding level would allow the promoter to infuse more capital if needed.

RBI has done well to allow promoters to retain a 26% shareholding in their banks, raising the cap from the current 15% which did seem somewhat restrictive. Allowing the promoter to have a controlling share does not seem unreasonable; the ceiling on voting rights is also 26%. The logic espoused by the PJ Nayak Committee, while calling for a promoter holding of 25%, seems sound; the panel had argued a low promoter shareholding might weaken the alignment between the management and shareholders, debilitating the lender. For the first five years, however, promoters must hold 40% of the equity capital and they must come up with a schedule detailing how they will dilute their shareholding to 26%. Promoters must be held to this plan.

Simplifying the ownership of non-promoter shareholders is also a welcome measure. While retaining the cap for non-promoters-natural persons and non-financial institutions/entities-at 10%, the new rules stipulate a 15% cap for financial institutions, PSUs and government. This is lower than the 40% cap currently in place for one class of FIs, supranational institutions, PSUs and government. The central bank reasons that the logic for restricting the shareholding of the promoter should be applicable to non-promoter shareholders as well; that seems fair. Increasing the minimum capital requirements for new bank licences, to Rs 1,000 crore for a universal bank from Rs 500 crore at present, and to Rs 300 crore for an SFB from the current level of Rs 200 crore, is a good move; we need our lenders to be well-capitalised.

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