KV Kamath, who has just completed his five-year tenure at the New Development Bank as chairman, says India needs large financial institutions to meet the growth aspiration of $5 trillion to $10 trillion in 10 years.
"What we need to do to get to $10 trillion GDP in 10 years. We need larger institutions for sure. As a first step, the aspiration is to get to $5 trillion but if you look at $10 trillion in the next 10 years, there is a step change that is required," said Kamath who built the foundation of BRICS-focussed development bank in the last 5 years.
A RBI internal working group has recently recommended that large corporate and industrial houses should be allowed to set up banks. The group has also recommended allowing well run large NBFCs with asset size of Rs 50,000 crore and above, including those owned by corporate houses, to transform into banks.
"The point that strikes me in the working group report is that how big are the Indian banks in the context of the economy. The nearest or the right parallel is the Chinese banks. Here we are looking at a banking system of 1.7 times of its GDP and in India, by contrast, it is 0.7 times of the GDP," explained Kamath.
Clearly, the Chinese banking system is almost twice the size of its GDP, whereas Indian banking system is far smaller.
The RBI report also makes a point that growth will be or is going to be skewed in the banking sector. In fact, it is already skewed, and hence India will need more private sector participation to prepare for the endeavours the country needs to undertake to achieve its economic goals. There will be large fund requirements to fund the growth in infrastructure financing. The MSME sector is another area where funds needs to flow. The consumer or retail banking, too, is expanding at a fast pace in semi-urban and rural areas.
So which kind of institutions could be the best option to achieve size and scale?
"That leaves the large enterprises which falls in the private sector," said Kamath.
Kamath appreciates the report for explaining the clear caveats that only when the time is right and RBI's own supervisory capabilities are strengthened, licenses should be given to corporates.
"While it is desirable, there will be be certain pre-conditions that have to be met in terms of strengthening the supervisory capabilities. Interestingly, we are quickly moving to a time at least in the technological context where all these conditions can be met in the near term," said Kamath.
On the NBFCs' conversion into banks, Kamath said given the size of some NBFCs, the regulators think and believe that they should not pose a systemic risk. "The other way is to look at it as systemically important institution like certain banks. So the regulators would like to supervise them more closely like banks," said Kamath.
"The ownership is secondary. The systemic risk issue is paramount in the minds of the regulators," he added.