Pot of gold or mirage?

Indian firms want to launch banks, but is it a good idea?

Almost every top company I talk to nowadays is talking about setting up a bank. Right from the Tatas, the Birlas to Videocon to even Jain Irrigation, every company wants a bank under its banner. The massive growth in market capitalisation in the last 15 years of the last eight private banks, led by HDFC Bank and ICICI Bank is making every corporate to see a pot of gold in the sector.

Among the many companies in the queue to get a banking license are:  L&T Finance, LIC HF, PFC, Shriram Group, apart from an assortment of top corporates. Several are already talking to former RBI governors and retired SBI and other public sector banks to help them launch the bank as and when RBI issues permits.

But some analysts are warning that it may not be such a good idea to launch a bank. The reason,  says Percy Mistry, former advisor to World Bank, the rigid structure of the Indian banking system with continued public sector domination, which is damaging both the financial system and the Indian economy quite badly. And the constraints on real banking with the pre-emption of deposits resulting from 27-30% Statutory Liquidity Ratio, 4-5% Cash Reserve Ratio and 40% priority sector lending (when neither the government nor the RBI has a clue about what our real priorities are or ought to be), and 5-8% NPAs or bad debts (in reality as opposed to ever-greened fiction). That leaves only about 15% of the banking book to be lent with any managerial discretion.

Add  financial inclusion, says Mistry, with RBI insisting rather foolishly -- as if it is peddling Heineken beer instead of scarce resources -- on forcing new private banks to reach parts of the banking market (i.e. the supposedly profitable bottom of the pyramid) that even the public sector banks have not been able to reach after 50 years.  Mistry says under those conditions, he would not want to enter Indian banking space at current margins; especially given the substantially greater opportunities elsewhere like the UK despite the low growth there compared to India.

Mistry says India does not need more new private banks though he does not see anything wrong with letting the market work openly and allowing new banks to enter and fail without as much of a song and dance as we seem to be making.  Instead India needs much more to privatise rapidly the public sector banks that are now cluttering up the Indian banking landscape. Our public sector banks and other public financial institutions in insurance, unit trusts etc., he says, are encouraging a cosy politician-industrialist  nexus to take a hold of the Indian economy, resulting in almost a Russian style klepto-market-capture model, rather than a properly regulated market economy, emerging in India.

Wonder how many of the CEOs and promoters who are aspiring for a bank permit are listening to Mr Mistry’s warning.