The Reserve Bank of India is confronted with a Hamlet-like dilemma: the matter of issuing or not issuing new licences to private sector industrial and business houses and non-banking financial companies (NBFCs). The RBI had in August issued a discussion paper on the various aspects involving issuing of licences to corporate houses and NBFCs. Its objective of licensing news banks was to introduce competition in the banking sector to make it more efficient and cost-effective and, more importantly, to enable inclusive growth in the financial sector. Till date 70 per cent of the rural population remains outside the banking system in most of the 60,000 villages. The public sector banks control about 70 per cent of the banking business and the rest is controlled by the private sector and others. To remedy this unacceptable and undemocratic situation the RBI expects that the new banks it proposes to licence would go a long way in providing services to those excluded from the banking system.
The feedback received by the RBI to its discussion paper is divided on predictable lines with the business chambers and associations making a pitch for licences for private corporate houses with an initial capital of `1,000 crore. They were also for NBFCs being given licences. Then there were the banks who were against giving licences to corporate houses with huge money power as it would upset the level playing field. They also felt that the past record of corporate houses in banking was not encouraging apart from the fact that there could be conflict of interest and misuse of bank funds. The all-India bank unions, too, are against giving new licences to corporate houses and are planning a huge agitation against this in February. They are even against the RBI trying to give the regional rural banks over to private sector business houses.
The RBI’s own view is that the licences issued to private business houses and NBFCs after 1993 have not produced satisfactory results. The experience of the RBI over these 17 years has been that banks promoted by individuals, though banking professionals, either failed or merged with other banks, or witnessed muted growth. In the case of four banks promoted by individuals in 1993, only one has survived, with “muted growth”. In the case of one bank the story was scandalous as it eroded its net worth by playing in the capital market and had to be merged with a nationalised bank. Even a bank promoted by a media house finally amalgamated with another private sector bank within five years of operations.
In this scenario, the RBI is once again on the same path and this is the dilemma: nothing has changed to warrant any confidence in private corporate houses fulfilling the objective of issuing new banking licences. Even strict regulatory guidelines and strict monitoring of the proposed new licensees is unlikely to succeed. One has seen in the telecom sector that most of those that got 2G licences have not rolled out their networks and the telecom regulator did not act against them. It was only when the 2G scam exploded that the government woke up to the need to do something about it, and that is being done at snail’s pace. One wonders if any action, such as penalties, will be taken against them.
The dilemma is that competition is needed in banks and this can only be provided by the big corporates. But the big corporates by and large are not perceived as being trustworthy of fulfilling the objectives of inclusive financial growth. Even the micro finance institutions were found to be more interested in pleasing their shareholders and themselves than the rural poor and unemployed.