Saturday, February 16, 2013

Banking licenses to private sector

GOI recently decide to give banking licenses to corporate houses. The main aim of giving new licenses is financial inclusion. In other words, to increase the number of houses covered by formal banking system and to make banking services available in rural areas etc.

I have serious doubts about the indented results of this policy. I am not against issuing new banking licenses to private sector but the question here is about issuing licenses to private corporate houses - who owns other companies as well. We badly needs banking reforms, not only in terms of issuing new licenses (last bank formed in India was way back in 2004 – ‘Yes bank’) but in terms of capital rations, reducing NPAs etc.

Let me put forward you some of my concerns

1. Will private banks increase financial inclusion?
My answer is - not much. We have a number of very successful private banks like - ICICI bank, HDFC bank etc. How many of their branches are rural? What is the minimum amount required to open a Savings Account in these banks? I don’t think you may be satisfied with the answers.

2. Won't the corporate houses try to raise loans for their group companies from their own banks?
Assume that, company 'A' badly needs a loan. If ‘A’ or its parent company owns a bank, then won't they try to raise the required amount from their own bank? What if it turned out to be a bad loan? Same question is applicable for funding new projects, parent/ Group Company’s debt restructuring etc.

3. Won't the issue of giving loans be compromised?
Won’t it become easy for corporate houses to register shell companies in offshore tax heavens and use the banks owned by them in Indian to fund their projects? Even now, tax authorities are struggling to swim through the complex holding patterns of shell companies to determine the owner.

4. Will the new banks reform Indian banking sector?
In telecom sector - brilliant baby of Indian liberalization - increasing competition reduced the rates. But in banking, situation is totally different. Even now I am very much worried about the proliferation/ aggressive marketing of credit cards.

5. What about NPA (Non-Performing Assets)?
Even now for many banks the ratio of NPA to total loans is not in a comfortable zone.


I agree that, giant PSU banks may not be able to bring reforms in the pace demanded by government. At the same time, there is no guarantee that private companies will do it either. Most probably they will operate in niche sectors – anything but not rural.  It is to be remembered here that, even US don't allow industrial houses to setup banks (but Britain does, of course with restrictions). We need new private banks, but I would like to see a) new licenses going to existing private financial institutions not operating in other areas b) ownership of any single promoter should not be more than 12-14%.



1. Despite concerns, govt to soon let corporates into banking - Business Standard

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