What if NBFCs and large Corporates are allowed to set up banks in India?
Introduction
Let's unlock the key to the readers heart by simulating a brief introduction. The very first time this subject "Allowing NBFCs and large Corporates to set up banks" came up in 2016. This was the time when the RBI (Reserve Bank of India) that is the Central Bank of India, issued guidelines, inviting applications for 'On - Tap'? Licensing to set up banks, wherein a company with a minimum capital of ?500 crore could apply. 'On-Tap' licensing as the name suggest ,is very? similar to acquiring a driver's license,wherein the applicant (in this case ),a company,has the benefit of applying on its discretion , i.e, whenever it's ready,and need not wait for a notification date or a 'last date' to apply. The technical rules about the assets or ownership were such that the Large Corporates,NBFcs ( Non- Banking Financial Company) and industrial houses could not apply for it.?
In June 2020 the RBI constituted the PK Mohanty committee headed by Prasanna Kumar Mohanty ,for Corporate Structure for Indian Private Banks , which recommended, in the favour of such NBFCs, Corporates , Industrial houses etc. Although recommended by the Mohanty committee, allowing their entry into the banking sector is still contended.
What is an NBFC? What roles do NBFCs, Large Corporates, and industrial houses play in the economic growth and development?
An NBFC (Non-Banking Financial Company) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares,stocks, bonds, debentures,securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agricultural activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale,purchase,construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company). Any company, with a minimum capital of 5 crores for Microfinance, and 2 crore for others?
can get itself registered under the Companies Act? 1956 as an NBFC. They cannot accept deposits and even the ones that do ,i.e, NBFC-D , which is a deposit taking NBFC can only accept time deposits e.g. Bajaj Finance wherein the deposits are not insured .Unlike Commercial Banks, they can invest the clients' money in share market example being Mutual Funds, Insurance Companies etc and consequently they are regulated by SEBI (Securities Exchange Board of India) the principal regulator of the share market in India or IRDAI ( Insurance Regulatory Development Authority of India) as the case may be. They can provide loans,and the interest rate varies,as it depends on the nature of business.
?Large corporates and industrial houses play a very significant role in an economy , by? providing employment opportunities on a mass scale, by contributing to the GDP ( Gross Domestic Product) etc .They are highly proficient in organising and carrying out activities? of social services on a large scale as a part of their mandatory Corporate Social Responsibility. These measures act as huge instruments for alleviating poverty to a large extent thereby aiding the economic growth.
Allowing their entry into the banking sector :
The optimists will almost always favour their entry into the banking industry putting forth various arguments in favour. The entry of Non- Banking Financial Institutions,Large corporates and industrial houses may lead to more competition among the banks to provide top-notch banking services to their customers, from offering better interest rates on credit,and deposits to better customer care services which has become a necessity considering the history of banks in India , from high lending rates to poor delivery of customer services and therefore poor performance and dissatisfied customers.?
领英推荐
The existing banks' balance sheets have already deteriorated owing to scams and bad loans, so as a result these banks have become overcautious in their lending processes especially to large business projects including those involving projects on infrastructure, renovation and development, so this not only makes the process of availing credit a cumbersome one , but also acts as a hindrance in growth and prosperity. In such a scenario,the entry of fresh new banks will invigorate the banking sector. This will also reduce the chances of scams and defaults? associated with NBFCs in future as they will be put under more effective supervision of RBI .Presently they are considered 'shadow banks' , citing the recent IL&FS scam .Shadow banking is a term used to describe bank-like activities (mainly lending) that take place outside the traditional banking sector. It is now commonly referred to internationally as non-bank financial intermediation or market-based finance. Shadow bank lending has a similar function to traditional bank lending.
In addition to the aforementioned justifications there also is a fact that when a bank infected with bad loans or scams has to be bailed out with taxpayers' money, from the taxpayer's point of view it hardly matters whether he is bailing out a PSU bank or a private bank owned by a crony capitalist or by an industrial house. When the problems of regulation are endemic, irrespective of who owns the bank, it would be unfair to single out the corporates and industrial houses and then say regulating them is going to be a problem.
This was an optimist's approach towards the subject. But as much the approach of an optimist is important so does the pessimist's and in some cases realist's . Above all a subject can be best understood if no dimension of it is left unexplored or untouched . To an optimist's argument of "increased competition" the pessimist would probably say , not always is ,an increased competition an evidence of better performance , in fact too much competition may also cause unintentional demoralisation of the existing banks, because of very obvious reasons - Large corporates and industrial houses have huge capital and resources which can be deployed and used ,to their benefit,to make huge profits, pushing the existing banks? on the sidelines. Furthermore this may lead to a natural tendency among banks to mis-sell the products and lend money to more risky and unviable businesses or projects, as evident from the 2008s American Subprime crisis.
The argument of "better and effective supervision "? seems humorous considering the present scenario. RBI has more or less proved to be an ineffective supervisor of the already existing banks , let alone supervising the new ones in this? already struggling banking industry , PNB-loan scam, Yes Bank scam, ICICI -Vodafone loan scam? to name a few. Large NBFCs are already involved in scams examples - IL&FS scam, DHFL scam, Karvy Capital scam, so a fear persists among the critics that allowing entry of such large? NBFCs? in the banking sector may lead to more scams and therefore will make the system unsustainable and unstable at the same time.
As far as large Corporates or industrial houses are concerned, corporate governance in many of the prominent ones ,is not at all inspiring confidence at present , citing issues and conflicts related to ownership and control among the stakeholders. Furthermore there are also many apprehensions that these large industrial houses whose sole aim to make huge profits, may use the depositors' money to finance their own projects or may even favour nepotism,even if such projects are unsustainable or unviable. This money could also be misused for money laundering by Big industrialists. They may,also concentrate India's economic power and the depositors' hard earned savings in the hands of few oligarch. This can destabilize the entire banking industry and therefore make the economy more prone and susceptible to shocks and jerks.
Even in the developed countries the regulators do not encourage the entry of large corporate in the banking sector mainly for the apprehensions about governmence and financial stability. Presently?
Conclusion?
Considering the arguments both in favour and that in against,a realist may make an effort to study the prevailing scenario and the present condition of the banking sector to reach a conclusion. If we go by? the arguments in against,? the entry of such institutions into the banking sector , would probably endanger the already average and undistinguished economy with truckload of scams , struggling to keep pace with the other economies . One can agree to the fact that there are a lot too many challenges and these challenges pose huge obstacles to? the dream of an efficient and strong economy . But any progressive country or an? economy would always desire having a better and an efficient system from the existing one because this is what humanity and mankind strives for . To strive and thrive is the key to achieving prosperity and growth . The present circumstances may although not favour the subject, but nothing succeeds like success , meaning only success at the smallest or lowest levels ensure a bigger victory in the future .
References :