New bank licences may have many pitfalls: Rana Kapoor
Consolidation will deliver the goal of financial inclusion rather than new bank licences, says Rana Kapoor.
The Indian banking sector is now a vibrant mix of nationalised banks, old and new private sector banks and foreign banks, supported by non-banking finance companies, or NBFCs, and microfinance institutions, or MFIs. They provide competitive and comprehensive services to the corporate and retail consumer segments. Some life-cycle challenges do remain, primarily in the area of providing sustainable credit and other services to marginal players.
The Reserve Bank of India's recent discussion paper on new bank licences explores the pros and cons of allowing industry houses, NBFCs and MFIs to embark on regular banking operations.
In my opinion, the potential risks of such a step - as identified in the paper - and the ramifications if things go wrong, far outweigh the perceived social benefits. Past experiences, in India and elsewhere, provide little comfort. The Japanese experience with keirestu, the Korean experience with chaebols, and the Indian experience prior to nationalisation are reminders of the pitfalls of commercial interests promoting banks. The recent concerns emanating from corporate governance issues, especially in the telecom and real estate sectors, exacerbate this discomfort.
Allowing corporate houses to enter the banking sector sets the stage for a conflict of interest. Banks must be 'neutral financial intermediaries', not biased in favour of vested businesses. The existence of diversified businesses and the need to track flow of funds will pose further challenges in regulation and supervision, thereby creating complexities in the rules and regulations, and also increasing the vulnerability of banks to real economy shocks.
In case any corporate entity presents a really compelling case, the regulator could, for example, consider a 'limited validity' licence to allow the entity to take over and restructure a fledgling regional rural bank, or RRB, thereby evaluating its competence while limiting the systemic risks of a potential corporateled bank fallout. As we have seen during the recent financial crisis, the biggest casualty when a bank fails is faith in the system and the ensuing collateral damage.
I believe that Indian economy is adequately banked, but underbranched and underserviced. A closer scrutiny and evaluation of the operating parameters of the existing players in the banking sector brings forth some meaningful observations. At present, India has 27 public sector banks, seven new private sector banks, 15 old private sector banks and 31 foreign banks, in addition to RRBs, local area banks, or LABs, and cooperative banks.
One of the segments within the existing framework that remains significantly underutilised is the old private sector banking space. Despite healthy capitalisation ratios, these banks have remained underperformers in many ways, including underleveraging their brand identity. For instance, the advances per branch of the old private sector banks (Rs 29.8 crore) are significantly lower than the industry aggregate (Rs 48.6 crore) and a third of the new private sector banks (Rs 91.8 crore). The deposit per branch ratio, too, exhibits a similar pattern.
The old private sector banks have not pursued national level branch expansion which could have enabled them to provide banking services to a wider population base. They registered the lowest branch growth amongst banking groups at 10 per cent against 29 per cent for the industry between 2005 and 2010.
In my view, there lies considerable potential in these old private sector banks, if their value can be unlocked. Further consolidation is a better way of achieving the broader goal of financial inclusion. India's largest banks today are less than 50 per cent of a comparable bank's size in a peer economy. A consolidated banking system, rather than a host of new smaller banks, provides the ability to cater to the end-to-end banking requirements of the economy.
Given the economic growth potential of the Indian economy over the next few decades, granting of new bank licences may eventually be warranted. The stand-alone NBFCs, including select MFIs, with proven track records and focused on catering to the financially-excluded, are best equipped to transform themselves into commercial banks.
The Indian banking sector's need of the hour is to further grow our established and proven banks, supplemented with more branches and higher focus on efficiency.
The author is founder and CEO of YES Bank
The Reserve Bank of India's recent discussion paper on new bank licences explores the pros and cons of allowing industry houses, NBFCs and MFIs to embark on regular banking operations.
In my opinion, the potential risks of such a step - as identified in the paper - and the ramifications if things go wrong, far outweigh the perceived social benefits. Past experiences, in India and elsewhere, provide little comfort. The Japanese experience with keirestu, the Korean experience with chaebols, and the Indian experience prior to nationalisation are reminders of the pitfalls of commercial interests promoting banks. The recent concerns emanating from corporate governance issues, especially in the telecom and real estate sectors, exacerbate this discomfort.
Kapoor's take
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In case any corporate entity presents a really compelling case, the regulator could, for example, consider a 'limited validity' licence to allow the entity to take over and restructure a fledgling regional rural bank, or RRB, thereby evaluating its competence while limiting the systemic risks of a potential corporateled bank fallout. As we have seen during the recent financial crisis, the biggest casualty when a bank fails is faith in the system and the ensuing collateral damage.
I believe that Indian economy is adequately banked, but underbranched and underserviced. A closer scrutiny and evaluation of the operating parameters of the existing players in the banking sector brings forth some meaningful observations. At present, India has 27 public sector banks, seven new private sector banks, 15 old private sector banks and 31 foreign banks, in addition to RRBs, local area banks, or LABs, and cooperative banks.
One of the segments within the existing framework that remains significantly underutilised is the old private sector banking space. Despite healthy capitalisation ratios, these banks have remained underperformers in many ways, including underleveraging their brand identity. For instance, the advances per branch of the old private sector banks (Rs 29.8 crore) are significantly lower than the industry aggregate (Rs 48.6 crore) and a third of the new private sector banks (Rs 91.8 crore). The deposit per branch ratio, too, exhibits a similar pattern.
The old private sector banks have not pursued national level branch expansion which could have enabled them to provide banking services to a wider population base. They registered the lowest branch growth amongst banking groups at 10 per cent against 29 per cent for the industry between 2005 and 2010.
In my view, there lies considerable potential in these old private sector banks, if their value can be unlocked. Further consolidation is a better way of achieving the broader goal of financial inclusion. India's largest banks today are less than 50 per cent of a comparable bank's size in a peer economy. A consolidated banking system, rather than a host of new smaller banks, provides the ability to cater to the end-to-end banking requirements of the economy.
Given the economic growth potential of the Indian economy over the next few decades, granting of new bank licences may eventually be warranted. The stand-alone NBFCs, including select MFIs, with proven track records and focused on catering to the financially-excluded, are best equipped to transform themselves into commercial banks.
The Indian banking sector's need of the hour is to further grow our established and proven banks, supplemented with more branches and higher focus on efficiency.
The author is founder and CEO of YES Bank
