Bad bank on companies: why the fate of the bank, public finances are uncertain

The government is in a hurry to give companies an edge over existing players.

Atul K Thakur

Policy making in India is often seen as under threat today, lack of expertise is its hallmark. Without strong imagination and process efficiency, a strong urge to redefine the fundamental character of India drove Prime Minister Narendra Modi to unconventional experiments on the political fronts. On a large scale, the process of collective material loss was inflicted with demonetization, flawed GST implementation, and hasty lockdown. The economy and the people already shaken by such measures are now extremely vulnerable, as the government, short of resources, opens up the banking sector without altruism by allowing business houses to own their banks. This precisely means that for limited equity, the business houses will have the freedom to gamble with the public money parked in the new banks. Systemic risk will multiply.

On July 19, 1969, then Prime Minister Indira Gandhi had nationalized 14 of the largest private sector banks to give the project formal financing and credit, an unprecedented boost. This landmark move has proven to be beneficial for the country, but it has come at a cost as public sector banks (PSBs) have failed to improve their governance structure as planned. While the economic reforms that began in the early 1990s changed the banking model, the PSBs in particular did not accept the changing fundamentals and suffered from the advent of organized cronyism over the years. While the degradation of ethics has led to a weaker balance sheet and existential crisis for many PSBs, the country has even seen the worst show of corporate governance in private banks.

The RBI’s Internal Working Group (IWG) advocated for the entry of private companies into the Indian banking system – at acknowledged risk and despite the unfavorable opinions of experts expressed during the consultations. At least for public consumption, IWG was created to review existing ownership guidelines in addition to exploring the option of allowing companies to do true banking at their end.

On the expected line, IWG made a recommendation on November 20, 2020 to allow the entry of companies into the Indian banking sector. What was amazing was that the IWG also suggested changes to the Banking Regulation Act 1949 to prevent “related loans” without specifying how this would be possible. Apparently, members of the IWG haven’t worked hard enough to provide a better alibi for defending the deepest pandemonium to come. In the simplest argument, corporate companies know how to redirect money and they can easily cope with the naive changes proposed.

The IWG report made it clear that India’s past experiences mean next to nothing to those currently at the helm. Thanks to this plan, the Indian banking sector will travel through time and emulate the logic that led to the nationalization of the banks in 1969. In the past, there was a government for the people and it made a good game of balance by ending the vicious circle of corporate-owned banking structure. Over the next eleven years of Indian independence, the country experienced an unprecedented bloodbath on Mint Street with the complete collapse of 361 banks.

Fortunately, the trend was reversed with the nationalization of the banks and the RBI saved the banking sector in India by keeping a pragmatic approach. The 12 old and 9 new private banks came into being after 1991. By then, public banks had already strengthened the basis of the institutional culture of credit and public finance. These 21 private banks are owned by individual investors and entities with a direct interest in the financial sector. Another worrying plan is to let NBFCs with minimum assets of Rs 50,000 crore and 10 years of existence convert into full-fledged banks.

Putting in place a backdoor will increase the ability of businesses to hijack cheaper credit and, in this cycle, make the system precarious. Obviously, the American model is emulated half-heartedly. The understanding should have been exactly the opposite: India’s financial sector has been dominated by banks, unlike the United States where the NBFCs have benefited from excessive easing that dramatically increased the drivers of the subprime mortgage crisis and global economic collapse. of the end of the last decade.

Even earlier, on numerous occasions, corporate houses attempted to re-enter the banking scene from which they dethroned in the wake of banking democratization. They were not successful at the time as the Ministry of Finance saw such outrageous attempts and the rest is the story of how India successfully overcame the severe problems of the Asian financial crisis from l ‘Is in 1997-98, the crisis of the year 2000 and the global financial crisis in 2008. Prudence was “virtue” – and “ignorance” was not blissful back then.

With RBI’s inability to maintain regulatory oversight, a serious crisis in banks and NBFCs looms on the horizon. Most importantly, with the overt looting of public money by the politically linked failing companies of Punjab National Bank, Yes Bank, PMC Bank, ICICI Bank, Infrastructure Leasing and Financial Services and Dewan Housing Finance Corporation Limited.

Raghuram Rajan, former governor and Viral Acharya, former deputy governor, RBI rightly argued that allowing the entry of businesses into the banking system could intensify the concentration of political and economic power in the hands of a few. privileged business houses. In their most relevant observations, Rajan and Acharya argue that “the highly indebted and politically connected business houses will have the greatest incentive and the greatest ability to lobby for new banking licenses, a move that could make India more likely to succumb to authoritarian cronyism ”. At one point, both were insiders of the Indian financial system – and their reading of the spectrum makes sense.

The government will not stop there and it will review the roles of PFC, NHB and HUDCO. Anyone with a healthy commitment to public welfare will feel disturbed by this decision falsely disguised as “reform”. With the position of the RBI, the fate of banking and public finances in general is uncertain. The government is in a hurry to give companies an edge over existing players. The reasons would be better known to those in power, people can at best ask: why such an emergency? It is indeed unfortunate to witness a preventable tragedy unfolding. India can do better without the draconian targets and laws!

Atul K Thakur is a Delhi-based political analyst and columnist. The opinions expressed are personal of the author.

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