Should corporates get banking licences?

Since the time I have heard that the government is planning to give new banking licences and that a number of corporates like Reliance, Religare and others are waiting in line to get one, sleeping at night has become a little difficult. I believe that none of the corporates should be given licences. No discussion. Why? Let me give you my reasons.

First and foremost, it would lead to concentration of economic power in the hands of few. Now some can argue that by this reasoning, we should stop large corporates from expanding or diversifying into any sector. Well, this is not true. Banks deal with public money. They deal with the savings and in some cases the lifetime savings of the general public. These people whose savings are involved in Banks do not have any rights as the shareholders of the company do. They have no control over the management of the bank. There are plenty of businesses available for the big corporates to invest and create wealth but banks is not one of them. Not only will there be too much concentration of wealth to start with, but it will also increase the concentration of economic wealth in their hands as they will be able to finance their own businesses.

It is obvious that high concentration of economic power will also lead to high concentration of political influence as well as political interference. The nexus between the industrialists and the politicians will get a tremendous boost. The level of undue influence will work both ways, that is, industrialists influencing policy making and politicians influencing banking policies. After hearing the Radia tapes, no one in their right mind would advocate that banking licences should be given to the corporates.

Another reason why corporates should not be given banking licence is that we do not have a good record of regulating the private sector. A classic example is that of TRAI. None of the mobile companies adhere to what TRAI says unless it is in their interest. Before coming out with any policy, it consults with the mobile companies and whatever the mobile companies do not like does not happen. The same thing will happen with the Banking Regulator.

Also, why do corporates need to own banks? They already own banks. Corporates like Tatas, Sunil Mittal, Malvinder Singh, Chandras and Hero Group already dictate terms to the bank. Quite a few of them are on the board of national or private banks. They socialize with the CEOs of the bank. I am not sure why they need to own banks. We also saw that some new mobile operators received huge loan just onthe basis of the licence issued by the government.

Further, corporates will divert funds to their pet project. If they are in financial trouble, they will use the bank’s funds to get them out of trouble. I hope Vijay Mallaya is also not in the race to own a bank because a guy who could hold off paying crores to the government oil companies and the airport authority of India would think nothing of using the depositors money to bail him out. As we have seen in the past, promoter groups of companies keep raising funds by mortgaging their equity in the companies putting at risk the future of the companies that they promote. In the case of banks, this practice could lead to disaster.

Furthermore, we have learnt during the financial crisis that it is not wise to have companies that are too big to fail. When this happens, government and indirectly the citizens of the country ends up bailing them out as it happened in US. In India, we all remember when the airline industry was in trouble, they were asking for support from the government and Vijay Mallaya even wanted to join hands with Jet to monopolize certain routes. Incidently, Minister Praful Patel was even interested in supporting them.

Now some of the people have argued that it is the corporates that can build the scale required to achieve financial inclusion. This is one of the most illogical reason I have heard so far. Corporates are not interested in financial inclusion and rightly so. You cannot give corporates two confusing objectives, that is, financial inclusion and profitability. The best example I have to make my point is SKS microfinance. Now you find me anyone who can pay 36% interest that SKS was charging its bottom of the pyramid customers and later still be capable of being considered for physical inclusion let alone financial inclusion will be a miracle. In fact, I was even surprised to find a respected industry leader Narayan Murthy had heavily invested in an idea and a model that was bound to fail. If a guy was expected to pay 36% interest then he has to earn at least 50% return on investment. Now how many businesses are there where you can get such returns unless you are mixing kerosene with diesel. We know that Religare is interested in a banking licence. I am not sure if you know that the Singh brothers approached SEBI that they be given permission to save tax on the sale of their company for Rs. 10,000 crores. While submitting their application to SEBI, I am not sure if they were thinking of financial inclusion fot themselves or for the bottom of the pyramid.

For those who think large corporates would be interested in financial inclusion the let me propose an idea to you. Lets give banking licence to corporates for non-metro and non-tier 1, 2 and 3 cities and also put a condition that they will not be able to have their own companies and associate companies as their clients. I am sure the corporates would do a rethink. However, coming to think of it, this could be the model that we adopt to give licences for new banks.

I think something like this would work because they would have no choice but to generate business from the local market and I am sure that they will. Why doesn’t the government identify the areas that need development and financial inclusion and form 4 Banking Companies. If there are any bank branches of existing PSU banks in such areas, include them in these companies and then offer the same to the private sector. apart from the conditions already identified above, offer them a carrot that they will be able to go national after ten years after they have fulfilled certain benchmarks. We already have similar models available for airline which can fly abroad after certain number of years or the rollout conditions for obtaining keeping the telcom licence.

I hope the government is listening. I think I am hoping for too much. What will actually happen is that big corporates will get banking licence.

Avinash Narula

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banking licence allotment should not be so much flexible.the banking facilities must be easy to the users.


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