đŚ RBI doesn't want India Inc to Own Banks?
India's banking sector is far behind the other countries. Actions have to be taken. But at what cost?
If you are in India, you canât spend a day without using products by Tata, HUL or a Reliance. Salt to airplanes, these players produce anything and everything. Everything, except having banks of their own. Doesnât this seem strange?
Why does India Inc not have banks of its own?Â
Well, what if we tell you that it came very very close to having banks. But the RBI has spoiled the party for them.Â
A New Future for Banks?
There used to be a time when India had many many private banks. But things changed in 1969. About 14 private and commercial banks were nationalised by the government of India. But why was the government required to take such drastic actions? Because these private banks were operating for profit. Now the hunger for profits is not a bad thing. Thatâs how you prosper. But to be so obsessed with profits, that you are not bothered about the countryâs prosperity, definitely bothered the government. Â
These banks loaned almost 67% of their funds to big companies that they were sure could pay them back. This was also the time of the Green Revolution in India when farmers were modernizing their operations. The profit-hungry banks weren't very keen on giving loans to these farmers. Or for that matter to any growing and upcoming industry that showed risky tendencies. Heck, they didnât even bother to expand in the villages. For every 64,000 people, there was just one bank branch in 1969!
So the government had to take matters into its own hands. Something as crucial as banking, could not be allowed to be run by private players. Not just this, large corporations also could not purchase more than 10% equity in banks or have a controlling stake.
But times have now changed. Many private banks have since entered the scene and have been widely accepted. You can see that from the credit growth of the banking sector as more private banks have come up.Â
While the entry of private banks has sped things up, there is still a long way to go.
Currently, the asset size of India's banking sector only accounts for 70% of the GDP. Even smaller countries like Brazil and Chile are doing better. Only one Indian bank, SBI, is in the top 100 global banks by size. Not just that, Indian banks are also at the bottom of the list when it comes to cost efficiency, mainly because they have to bear the costs of a large staff. The net pre-tax profit generated by the Indian banks per unit of operating costs is $0.14 million as compared to a global average of $1 million.
If the Indian Banking system wants to compete with the rest of the world, the stifling restrictions have to be eased. And so an internal working group (IWG) has suggested that big corporations be allowed to own Indian banks.Â
The move will save taxpayers' money. You see, the Indian government spends lakhs of crores of rupees to ensure that these public sector banks are running smoothly. In the Budget 2019-20, Rs. 70,000 crores were allocated for public sector banks. The IWG feels that this taxpayer money could be put to much better use. These big corporations worth billions of dollars can then run these banks using their own money. Sounds like a plan?
Well, the RBI wasnât impressed. But why? Is it too stuck in its old-fashioned ways to see the benefit of this new proposal? Or is there a reason?
RBI's Reasoning
It's not just the current RBI leadership that disagrees with this idea. Even former RBI governor Raghuram Rajan and deputy governor Viral Acharya believe that allowing corporations to own banks is a "bad idea".Â
Because this would give big corporations an unlimited pool of funds. How so?Â
Once these corporations own the bank they will be free to decide whom to give loans and at what interest rate. Now, this is a considerable power. Imagine Reliance Industries Limited owning its own bank, taking deposits from people, and giving loans to itself. Could be anti-competitive naa? And why just that, imagine how risky it will get. If the company or the related parties were to declare bankruptcy who will stand to lose? The common public.Â
Even the RBI has not firmly picked a side, to be honest. In 2013, it allowed some companies to apply for banking licenses. While many companies had shown interest, the RBI got cold feet at the last minute and gave licenses only to IDFC Bank and Bandhan Bank.Â
RBI might have said a ânoâ now. But it could change to a âyesâ. Will allowing corporate-run banks be a good idea?
What are your thoughts?
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