Former HDFC Bank MD and CEO Aditya Puri has said allowing big corporates in banking business is not a bad idea if there is a proper regulatory framework to ensure appropriate action in time. An internal working group of the Reserve Bank of India recently recommended that large corporate and industrial houses should be allowed to set up banks.
The group also recommended allowing well-run large NBFCs, with asset size of Rs 50,000 crore and above, including those owned by corporate houses, to convert into banks. Experts are, however, divided on the issue. In fact, most experts the working group interacted had given a thumbs down to the proposal.
"We have to get credit and scale very fast. If we can ensure credit and scale and regulations, which ensure appropriate action at the right time, I think that (allowing corporate) is almost a necessity to try," believes Puri, who built a new generation private bank from scratch.
The 70-year-old Puri had retired from the top private bank in October this year. The current banking system in India is dominated by public sector banks, which control over two-third of banking in terms of deposits and advances.
Over the last two decades, a handful of banks like HDFC Bank, ICICI Bank, Axis, Kotak and IndusInd Bank have managed to build some scale in their businesses.
Foreign banks currently operate as a branch model despite having the option of a wholly-owned subsidiary model, with more freedom to open branches and allowing M&As. Barring RBL and Federal Bank, the old private sector banks also failed to scale up their business nationally.
The RBI did give small-banking licences recently, but it would take time for them to build size and scale. The payments banking model, however, failed to take off, with many surrendering their licences or considering switching to the small finance banking platform.
There is a view that India should allow large corporates to bring scale in banking business. The country has set an ambitious target of a $5 trillion economy. There are disruptions in the short-term after Covid-19 but the economy will get back to higher growth in medium to long term. Puri says there are global examples from Malaysia to Hong Kong allowing corporate in banking. "Some allow it and some don't," he reasons.
A former RBI executive director G Padmanabhan had recently said that if there are proper checks and balances, then what is the problem in allowing corporates in banking business?
Puri, too, echoes similar views. "If we have a good corporate house with a track record of integrity and proper regulatory framework, which now technology is allowing and also appropriate action at the right time, it is not a bad idea," Puri said.
In the past, the banking sector has seen some failures like Global Trust Bank, IL&FS, IDBI Bank, PMC Bank, Yes Bank and Lakshmi Vilas Bank. In some other cases like Bank of Rajasthan, Centurion Bank of Punjab, the RBI had acted in time by merging them with private sector banks.
The RBI also claims that it has strengthened its supervisory mechanism in the last two years. "The kind of deep dive and analysis, which we are doing, the kind of test of our supervision which we have achieved in the last two years, is something like never before," RBI Governor said recently.
Puri says: "A lot of things can be taken care of when the first sign of trouble surfaces."
On the licences to corporate, Governor Shaktikanta Das said it is just a report by an internal working group. "It should not be seen as the RBI's point of view or decision. That has to be clearly understood," he said.
The five-member internal working group had two external members, who are also the members of the RBI central board. "The internal working group has acted independently. They had their independent deliberations and they have given a certain point of view. The RBI has not taken any decision on these issues so far," Das said.