There are checks & balances — RBI panel member defends bank licences to corporates push

RBI panel member Sachin Chaturvedi says there is nothing new in industrial houses promoting banks & checks and balances have been proposed to avoid connected lending.

Representational Image of Indian banks | Vivek Prakash | Bloomberg

Mumbai: Countering criticism by former central bankers and economists on the Reserve Bank of India’s Internal Working Group’s (IWG) proposal to grant bank licences to business houses, Sachin Chaturvedi, a member of the panel said checks and balances were proposed to avoid connected lending, while expressing surprise that those caveats were missed by critics of the proposal.

In an exclusive interview to The Print, Chaturvedi said there is nothing new in the proposal allowing corporate houses in banking.

“If you read the chapter 2 of the report, you would find that the committee has further built on the space for private sector banks that was created way back in 1993 when six private banks were given licences. So this report is not talking anything new when it comes to licences to big business houses,” said Chaturvedi, Director General, Research and Information System for Developing Countries (RIS), a New Delhi-based policy research institute.

“…there is nothing new in industrial houses promoting banks…otherwise you would not have got a Yes Bank or a Kotak Mahindra Bank,” he added. Kotak Mahindra Bank and Yes Bank were granted a bank licence when the window was opened in 2001.

Chaturvedi works on issues related to development economics, involving development finance, SDGs and South-South Cooperation, apart from trade, investment and innovation linkages with special focus on WTO.

He has been part of several important initiatives of the Government of India and takes keen interest in transforming economic policymaking towards integrated and evidence based approaches.

In August 2016 – while announcing on-tap bank licence norms, the RBI disqualified business houses whose non-financial businesses accounted for more than 40 per cent or more in terms of total assets or gross income, from applying for a bank licence.

Connected lending

In a joint paper published last week, former RBI governor Raghuram Rajan and former deputy governor Viral Acharya, said the proposal to allow industrial houses in banking is a ‘”bad idea’’.

“It will further exacerbate the concentration of economic (and political) power in certain business houses,” Rajan and Acharya wrote.

Widely credited for predicting the global financial crisis of 2008, Rajan, the former chief economist of the International Monetary Fund (IMF), headed the RBI from September 2013 to September 2016.

There is an apprehension by critics that such a move will result in banks promoted by business houses ending up lending to other entities of the same group. This is known as connected lending, camouflaged lending or mutual lending.

Chaturvedi, however, said that the Non-Operative Financial Holding Company (NOFHC) structure that was mooted in 2013 was aimed at avoiding such lending practices.

“We have suggested that if private sector banks are there, then they should be part of NOFHC structure that was suggested during the 2013 guidelines, and that should be made mandatory, for which necessary amendments in the Banking Regulation Act, 1949 should be made. What kind of amendments should be made, is also discussed [in the IWG report].”

“2013 guidelines suggested that for private sector banks, to insulate themselves from lending to related parties, in order to check on nepotism and linked company transfers, the NOFHC structure should be followed. And we have said that this structure should be applicable to all. If Bajaj Finance is getting into it, it should not happen they are lending to the Bajaj Companies. Like it happened in the case of IL&FS. We have clearly said new guidelines should be developed so that same party transfers are avoided and blocked and we have suggested that changes should be brought in. So those details should not be missed out. I am surprised that this is being missed out. Those caveats are very strong and clearly mentioned,” he reasoned.

$5 trillion economy argument

The IWG panel has backed its proposal to grant licences to business houses on the ground that they would bring in fresh capital, experience, management expertise, and strategic direction to banking. The report also observed that corporate houses have been successfully operating in other financial segments.

Chaturvedi said opening up the banking sector to industrial houses is also needed to achieve the goal of a $5 trillion economy as envisaged by Prime Minister Narendra Modi.

“If we are trying to play a role in becoming a $5 trillion economy when the institutional preparedness, particularly in the recovery period of Covid-19, would require a better and robust response, we have to step up our supervisory role, we have to step up our ability to leverage technology for that and we also have to allow economic and commercial activities by different actors. In the report we have talked about all different actors who can play this role,” he said.

The report also observed that private sector banks have rapidly increased their market share, in both loans and deposits, at the cost of their public sector counterparts in the last five years as the state-run lenders were choked with ballooning bad loans that hindered business expansion.

“This (PSBs losing market share) was because of NPAs. With taxpayers’ money you keep on recapitalising them. The other point is credit to GDP ratio is still in a worrisome zone,” Chaturvedi said, indicating one of the key reasons for offering licences to cash rich corporate houses is to increase credit penetration in the country.

NBFCs & universal banks

The IWG proposal suggesting well run non-banking finance companies, including those owned by corporate houses, will be considered for conversion into banks subject to 10 years of operations, has failed to cheer shadow banks. This is because another proposal said the bank and its existing subsidiaries, joint ventures and associates should not be allowed to engage in similar activity that a bank is permitted to undertake departmentally. This would mean the NBFC has to give up its identity as a shadow bank if it wants to convert into a universal bank.

“Our point and perspective is very clear. Those NBFCs, which want to convert into a small finance bank role or universal bank, then should have arms-length from that NBFC role. So that we avoid cross-party transactions. If that is not avoided then you end with problems in several of these banks — right from Yes Bank to Lakshmi Vilas (Bank), etc,” Chaturvedi said.

“So it is important that once you are in another role, you disassociate with earlier activities. No one is being compelled to become a universal bank. If you want to be, then you have to follow some guidelines,” he added.

Level playing field for new entrants

Observing that new entrants in the banking space face greater hurdles as compared to incumbents in terms of regulation, the IWG recommended that when a new licencing guideline is issued, if new rules are more relaxed, benefit should be given to existing banks, immediately. And if new rules are tougher, legacy banks should also conform to those regulations. The panel also suggested that a transition path may be finalised in consultation with affected banks to ensure compliance with new norms in a non-disruptive manner.

Chaturvedi said the proposal was to ensure new entrants have a level playing field with the existing banks.

“1993, 2001, 2013, 2016 – all different guidelines came up. All these guidelines were not coherently structured. As a result, existing banks had an advance over the new entrants, which faced several restrictions. So we said there should be better coherence across all guidelines. The new entrants should be at the level playing fields with those who came early,” Chaturvedi said, adding this would ensure that the new entrants were not in a disadvantageous position.