First, a confession is in order. Would I want to own a bank and have a key to the bank treasury to start a new airline? You bet! Can I promise that I won’t dip my hands into the till when my airline runs out of cash? Don’t you doubt it. And will I recuse myself where needed and follow corporate governance? Of course. Anything for the keys to the bank safe. If you ask a fox that is in charge of the henhouse to promise not to eat the chicks if he is hungry, what would the fox say? My promise would be as sacrosanct as his. You don’t give the keys of a henhouse to a fox. Not even to a virtuous fox. Period.
But the Reserve Bank of India (RBI), the last guardian of India’s financial and banking system, wants to do just that. That the RBI constituted an Internal Working Group to determine if large corporate houses can be given licence to promote banks and recommended that they be allowed to operate banks, all without inviting a larger public debate, is unconscionable. Banking regulations for licensing have not been diluted in the last 50 years to allow business barons to promote a bank. Whenever these requests came up, it was always frowned upon. That the RBI has recommended it even after its own Internal Working Group “found out from its set of experts that barring one, all of them were of the opinion that large corporate/industrial houses should not be allowed to promote a bank” is baffling.
Not a welcome move
In a joint paper posted on November 23, former RBI Governor Raghuram Rajan and former RBI Deputy Governor Viral Acharya termed the recommendations allowing corporates into banking a “bombshell” and said this proposal is “best left on the shelf”. Referring to business houses owning an in-house bank that may lead to self-lending, they said, “The history of such connected lending is invariably disastrous — how can the bank make good loans when it is owned by the borrower? Even an independent committed regulator, with all the information in the world, finds it difficult to be in every nook and corner of the financial system to stop poor lending. Information on loan performance is rarely timely or accurate. Yes Bank managed to conceal its weak exposures for considerable periods.”
Indeed, anything coming from Mr. Rajan or Mr. Acharya may be seen as being partisan or motivated by the present dispensation. But other experts have also not welcomed this move. Professor T.T. Ram Mohan wrote in this newspaper, “If the record of over-leveraging in the corporate world in recent years is anything to go by, the entry of corporate houses into banking is a road to perdition.” Hemindra Hazari, a well-known Securities and Exchange Board of India (SEBI) research analyst, wrote in an article titled ‘RBI’s working group recommends foxes be put in charge of chicken coops’: “Even under the existing financial regime, the RBI was unable to detect at an early stage the connected lending which felled large regulated financial entities like IL&FS, Yes Bank (Rana Kapoor and his entities held 10.6% as on end September 2018), Punjab and Maharashtra Co-operative Bank and DHFL (promoter holding 39%). Will it be able to effectively regulate and monitor large, complex industrial houses which are well versed in disguising financial transactions through a vast web of opaque domestic and foreign-based entities?” In a blistering critique in Bloomberg titled ‘India’s banking rules need to close door to tycoon cronyism’, renowned analyst Andy Mukherjee wrote: “From telecommunications to transportation, India’s business landscape is already starting to resemble a Monopoly board.” He recommended less risky options of asking corporates who promote banks to pare down their shareholding to 15% over the long term and penalties for misdemeanours and connected lending violations, by bringing down their voting rights to 5%.
The RBI is overlooking time-tested principles and limits of disallowing mega business houses from promoting and owning banks. It is saying this can be done by making necessary amendments to the Banking Regulation Act of 1949 to deal with connected lending and linkages between banks and non-financial group entities, and strengthening the supervisory mechanism for conglomerates. This is in stark departure from its long-held opinion on the subject since 1969 when banks were nationalised. History is replete with evidence of business barons who were good when they started out only to eventually morph into robber barons who not only enriched themselves owing to their enormous wealth and nexus with politicians in power, but also crushed competition. It will be naive to believe that a bank owned by a corporate house will permit lending to its competitors. Mr. Mukherjee ended his article eloquently saying, “To roll out red carpet to wannabe JP Morgans would be an abdication of the RBI’s financial stability and mandate.”
The way forward
Public sector banks may be inefficient and indifferent and under the influence of the party in power but private sector banks that are owned by oligarchs and business tycoons in cahoots with politicians will be rapacious monsters. The way forward should be to privatise public sector banks by allowing wide and diversified holding of stock by the general public. If the government exits banking ownership, that would lead to professional management and broader distribution of wealth. The banks would come under both SEBI and stringent RBI guidelines.
Many a time when my company could not manage to restructure its loan and ended up in Debts Recovery Tribunals, how I wished I owned a bank! How can we expect virtue from modern-day business Maharajas when in the Mahabharata, even King Yudhishthira gambled away his wife, family and kingdom?
Captain G.R. Gopinath is a writer and founder of Air Deccan