A sense of glee and optimism has been around since the RBI announced a draft proposal about opening up banking licences to wider participants, especially the corporate houses. And it's with great sense of optimism and mirth that media, (capital) markets, "mediators" and some of the potential applicants have reacted to the news. The behaviour has been as if the banking licences would be granted for sure and the new banks will be operational in a few months.
The announcement was surprising from the regulatory point, that it's almost a 180 degree turn from its staunch belief for decades that corporate houses should not be given banking licences. It is also against the grain of such failed experiments globally.
It's known that for our GDP growth to grow, we need more credit growth; for which many more banks and a wider set of bank promoters/owners are needed. It's also market information that regulators have generally shied away from PE's-turning-promoters of financial firms.
There has been a similar feeling of resistance about foreign banks growing larger in the country. It's not known why the regulator has not strictly enforced (or even forced) the Wholly-Owned-Subsidiary (WOS) concept that it mooted for foreign banks to have in India.
Capital, cross-holdings & critique
There is a capitalist pool to be tapped, if at all. The non-corporate-houses-domestic-capitalists, who of late, don't seem to have any long-term patient capital to spare for banking. That leaves the only other but not-preferred-so-far-investor group: corporate houses.
With COVID-stuck economy, the domestic capital pool is very different from the cap-tables seen a year ago. The ability to generate free cash flows and profits in the short-term is currently limited to a few sectors.
Let's even assume that we will have regulatory supervision measures to ensure that cross-holdings/over-exposure of debt to domestic fiscal system/pass-through debt papers of bank owners are in check. Now, the big question is if at all we go down the path of giving licences to corporate houses: do we have the gumption to have the most transparency possible in the licencing process, so that no one is accused of "crony capitalism" in the issue of who all get the licence?
Unless surprisingly some applicant who does not make it takes the regulator to court to win a battle in the short term; but to make a foe for the longer term, which no one can afford to. On the other hand, the banking regulator does not have to give a reason for not granting a licence, as it has never done in the past.
Regulators generally don't like criticism/critique. Any not-so-positive-feedback could be construed as an affront to the institutional integrity and the regulatory framework; which is not the case with most feedback. Some regulators even shy away from participating in market discussions to avoid any perceived proximity to the stakeholders.
These self-imposed norms create an aura of an inward-looking strict bookish disciplinarian. In today's global economy, market places are inter-related just as market participants could be. It is imperative for regulators to keep an open mind to at least hear out the market participants.
Ideally, regulatory policy announcements could be made only post-stock-market hours on a Friday and with full explanations; so that no specific scrips are impacted for short-term gain/loss on grounds of "sentiments" or misplaced "notions".
Let's think of the retail investors who are not equipped to understand the implications of such announcements, but yet get impacted by the actions and reactions of institutional investors.
Let's overhaul the way we think and create policies, to overhaul our markets to develop, with sufficient safety-net to our fiscal system. It's better for our fiscal regulator to be conservative and not join the party. After all, everyone (and the economy) needs a conscience-keeper with an impeccable moral compass.
For corporate houses, their ability to work under a stringent regulatory watch and to have detailed disclosures and proactive communication will be a test of the toughest order.
One of the strong metaphors heard about new bank licences is that from the Mario Puzo novel, famously immortalised into the "Godfather" movie trilogy - "going legit" Those who aspire to own a bank have to realise that for the stability and security of the fiscal system at large, every scrutiny will be constantly made about them, regularly - of their past, present and in the future.
Even if they already own financial institutions, the rigour of banking regulations and consequent scrutiny of their larger corporate group (especially in light of interconnectedness) has not been felt by India Inc in general before.
And for those who think it's a new door opening for one and all, a gentle reminder that "on-tap" licencing has been around for some time; with zero new bank owners with this concept.
Thus, before anyone says "I do", simply introspect and ponder about this new thing called bank licence. It would surely be a life-altering milestone in any institutions' journey.
(The author is an Independent market commentator.)
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