The fine art of saying 'yea' and meaning 'nay'

By S. Swaminathan

Protagonists of structural reforms in the financial sector in India are generally known to fall into two categories. First those who believe that the nationalised banks need to be jolted out of their cloistered mindset that there should never be alternatives installed in the system and second those who cannot subscribe to the notion that if only operational autonomy can be conferred on management of public sector banks, the system will scale global benchmarks.

The first group can well be called the ``competition wallahs'' and the second the ``diehards''. If the Reserve Bank of India has given the impression over some years now of being a votary of much-needed competition in the banking business, make no mistake. The RBI has now come out strongly in favour of the status quo, making it reasonably clear that a new incarnation of commercial banks in the private sector would be an encumbrance if not a calamity.

The revised guidelines

In 1993, as part of their positive response to the recommendations of the Narasimham Committee-I, the Government and the RBI had created a framework for licensing new banks in the private sector. That a new generation of ten technology-savvy if elitist banks has come into the system with high visibility in the metropolitan cities cannot be denied even if these institutions with their high capital cost hold no serious competitive challenge to the NPA-infested, overmanned and customer-indifferent nationalised banks.

Whether or not the criteria of threshold capital and capital adequacy ratio originally set in 1993 constitute unquestioning adherence to international standards far exceeding the requirements of a sound banking system in a country like India where levels of average income and savings vary so greatly between the urban and the rural regions, the revised guidelines for new banks (in the future) seem to represent deep-seated allergy towards private-sector banking. And this at a time when regulatory standards have already become rigorous.

Capital requirements

To decree that the initial minimum paid-up capital for a new bank shall be Rs. 200 crores (as against Rs. 100 crores which the 1993 guidelines stipulated) is to drive home the message that hereafter private sector entrants into the banks will only be tolerated exceptions.

There is obviously no question of a level-playing field here as between the new entrants and the financially anaemic nationalised banks. The greater anomaly is the insistence that the initial paid-up capital should be stepped up to Rs. 300 crores within three years of commencement of business with the rider that the promoter's contribution shall, for all practical purposes, be pegged at 40 per cent of the initial paid-up capital.

The promoters will need to lock in their capital for a period of five years from the date of licensing of the banks. This is not a cruel provision but could well mean that progressively, over a three-year period, the promoters would be called upon to increase their stake from a minimum of Rs. 80 to Rs. 120 crores.

Given the stipulation that NRI participation in the primary equity of a new bank cannot exceed 40 per cent (including the contribution of a foreign bank or finance company), the chances are that a new bank cannot be licensed unless the promoters are capable of mustering a minimum of Rs. 120 crores to begin with in terms of their own funds and unless they are able to divest Rs. 40 crores of their equity to the public after one year of commencement of business. Is it so very obscure, this intention to demotivate even the few promoters who would dare to venture into banking with the continued discredited mandate of directed lending.

The MRTP bogey

Is India still crawling in a socialist era for the RBI to declare ``large industrial houses'' as being out of bounds for the new era of private sector banking? What a great concession is this that individual companies, ``directly or indirectly connected with large industrial houses'' can hold equity capital in a new bank up to 10 per cent. To say that such companies may not have a controlling interest in the bank is much too redundant a caveat! The import of the RBI ``blinkered vision'' is that the nexus between a new bank and its promoters should be limited to investment in the bank's equity and participation in its management without any other financial linkages through lending.

It is a curious position indeed which the RBI has chosen for itself - permit industrial companies to invest in a new bank and front - drive them but without resorting to the dreaded demoniac handholding relationship, call it industrial banking or whatever. The fatal assumption here is that banking in India (with all its constraints) is an exciting opportunity for profit if only companies would realise its immense potential as an avenue for diversification. It is as if the RBI believes that corporate houses that have burnt their boats while navigating the treacherous waters of non-banking finance will now be looking at commercial banking in the fashion of ``babes in the woods''!

Will any NBFC graduate?

Thanks to RBI's utter incapacity to handle the jungle of NBFCs (and in particular the failure to distinguish between leasing and finance companies with an impeccable record and hordes of fly-by- night operators), a whole new void has been created in the financial system. That some of the finance companies have a much larger client base and definitely better record in terms of owned funds and loan recoveries, apart from credible professional management, when compared with the nationalised banks, imparts strength to the idea that such NBFCs should upgrade themselves as commercial banks.

The expectation was that the RBI would provide an enabling framework for this graduation of the strong NBFCs into banks.

The revised guidelines for new banks announced by the RBI are hardly calculated to inspire the more successful NBFCs to jump on to the bandwagon of a banking system which would continue to be stifled by an unimaginative and mechanical regime of a Rs. 200- 300 crore net worth, a bankrupt prescription of priority lending, an uneconomic obligation in terms of opening branches in rural areas (up to 25 per cent) and so forth.

Financial sector reforms? Whatever ``musings'' Mr. Atal Behari Vajpayee felt like unburdening, the RBI is certain to play the customary role of an adamant, loyal and undiscriminating doorman!

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Section  : Business
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