Increasing the number of well- capitalised private banks will induce competition and dilute the concentration of economic power
It’s curious how resistance to any big change, invariably, comes from the “progressives’’ within a political system.
Farmers in Punjab and Haryana -- the “gold standard” of agricultural productivity in India -- are up in arms over the government’s hurried attempts to liberalise the marketing of agricultural produce, allowing farmers to sell to anyone they wish. So why are the farmers outraged?
They say that they never asked for this “gift”, so why was it being imposed on them? They suspect that it is a move to allow the “backdoor” entry of “corporates” enabling them to get control over the agricultural sector. Never mind that nothing is envisaged to stop farmers who are happy to sell to “Ardhtia” cartels in Central government-regulated mandis (markets) to continue to do so. Conspiracy theories, once born, acquire a life of their own.
In a similar vein, otherwise forward-looking Indian economists of the “left liberal” American tradition condemn the recommendation by a working group of the Reserve Bank last month that industrialists should be allowed to own banks, albeit with suitable checks, to create a “Chinese wall” (bad name this one!) around the banking operations of such business groups, to avoid “connected or mutual” lending.
Never mind that the only “unconnected” lending in Indian banking is when a middle-class woman goes to a bank for a loan to buy a house or a scooter! For all other personal or business lending, the bank must know and trust the borrower. How else do you explain the constant socialising that rotund banking types engage in? Networking has always been the traditional “oil” in the banking sector, and “connections” matter.
So why are economists of repute up in arms despite these ground realities. They say that “big business” cannot be “trusted” to play with a straight bat and would bend the rules to favour lending and, more important, soft-soap defaults, by borrowers connected to them.
Pause here for a fact check. The Rs 10 trillion-plus non-performing loans, even before the Covid-19 pandemic, are not the result of happenstance. Much of this is “directed” lending to unworthy “favoured” business borrowers. These came to light when growth stalled, pulling out the plug from various ponzi schemes in real estate and the stock markets. Stiffer asset classification rules from the RBI also helped to unearth the scams. Publicly-owned banks are the most affected, though poor governance and low managerial propriety standards were visible in some private banks as well.
Formalising the reality of this “jugalbandhi” by letting big business own banks transparently, rather than remain the unseen puppeteer, can only help reduce the existing systemic risk rather than increase it. Private banks should grow their asset share to equal that of public banks (which is now 70 per cent) while boosting credit levels to equal the GDP, up from 60 per cent today. Timely and forceful intervention by the RBI against delinquent management -- private or public -- as in the recent case of the Lakshmi Vilas Bank, is the way to go, to contain the rot, not to pull up the drawbridge against industry ownership in banks.
Consider the oldest, iconic Indian “brand” -- the Tatas. Do we envisage a Tata, a Godrej, a Bajaj or a Mahindra managed bank being less sound than the “diversified ownership” private banks in operation today? Look at the “newbie” business brands -- Jio for instance. Does Mukesh Ambani need to own a bank to get access to credit or to nudge its flow? What if N.R. Narayana Murthy or Azim Premji were to float banks. What could possibly compel them to damage their international stature and credit rating by committing irregularities in their banking operations?
We have moved well beyond the stymied sources for wealth creation which existed in 1949, when the Banking Regulation Act was framed. Regulatory systems and public expectations have evolved. Even the 2013 guidelines, liberalising the entry of private banks, did not specifically bar big business from owning banks. Forty per cent of the capital of the best private banks is held by international investors. The gains from retaining a healthy and “sustainable” asset profile and international governance standards far outweigh the domestic “benefits” from bending licensing norms for dodgy loans.
Left-leaning consumer activists raise the spectre of “concentration of wealth” and “higher inequality” if business is let in through the banking door. These fears are overblown. Increasing the number of well- capitalised private banks will induce competition and dilute the concentration of economic power. The way to reduce inequality is not by preventing billionaires from becoming richer, but by improving public services, creating decent jobs and enhancing the incomes of the poor.
Globalisation, corporatisation and industrialisation do tend to concentrate surpluses at the top. But they also expand the economic pie. Walking away from these pervasive global trends is not an option if growth is to be preserved. Pushing it to the high single digits, requires extensive liberalisation -- cutting through the post-1991 residual red tape and “re-liberalisation” -- hacking through the new accumulation since then with a motorized saw.
The key to manage big corporates is to have strong community-based governments with heightened accountability to the people, so that “cozy deals” and “crony capitalism” -- a much larger generic problem beyond banking -- are exposed and the guilty brought to book.
Are we there yet? Possibly not. Can we get there. Yes, we can. But not by stepping into Emperor Xi’s boots and undermining the public profile of big business -- just to keep them in respectful submission. The Chinese regulators, last month, torpedoed the giant $35 billion IPO of the Ant Group in Shanghai and Hong Kong to rein in the “outspoken” Jack Ma (shades pf Rahul Bajaj?), who criticised the government publicly.
Efficient banking is a key “commanding height” of the Indian economy. Accountability of banks to their creditors and minority shareholders needs to be strengthened. The RBI recognises that. But to shun the financial heft and managerial excellence of big business in scaling up bank services is like marching into the future with one hand permanently tied behind our back -- ideologically pure, possibly. But irresponsibly courageous and blindly devotional to the blunt governance strategies of an earlier era.