Can regulators have simple licencing conditions for sub-scale financial companies?
Srinath Sridharan March 31, 2021
That the financial services sector is regulated and under the "licence-format" is well-known. This includes banks, non-bank lending entities, ARCs, mutual funds, wealth management firms, insurance companies, microfinance institutions, and payment entities.
The widely held perception that the licence is worth a valuation-premium is misplaced.
Almost every financial services brand that expanded into multiple other financial services spaces, had this "license-scarcity" mentality and got into those businesses. Of course, the strategic pitch to their investors in explaining the diversification could have been - "to capture the share of wallet of the consumers &/or to offer complete financial products needed by the over 1.2 billion Indians".
Needless to say, consumer behaviour when it comes to borrowing ("taking money") is very different from when it comes to "investing" ("giving money"). So obviously, unless there is a strong brand-pull and superior product(s), the consumers don't use the same brand for all their financial needs.
Many of such companies in the Indian financial services space have sub-standard operations &/or sub-scale business volumes, that it does not make economic sense for them to be in that business at all. And it does not solve anything for the consumers' financial needs. Sub-scale companies cannot afford to attract cutting-edge talent and hence the consumers end up paying a heavy price. If the sponsors of these sub-scale companies are further low in their ability to bring additional equity capital, greater issues arise.
Most BFSI sectors also have their own industry associations. The usual thumb-rule works in favour of big-boys who dominate the industry with their sheer size and share of consumer acquisition. Smaller entities may not have the necessary influencing power to voice their opinions or even to share their business challenges.
For BFSI regulators and supervisors, their responsibility includes handling these sub-scale businesses too. It would take similar effort, trained (and much scarce) supervisory manpower, time, and cost to regulate and supervise these entities, compared to large-scale businesses. A consumer-friendly regulator has to solve all consumer issues regarding any of their industry brands - irrespective of their scale of business.
Regulators are also expected to steer the sector towards stable growth, in a way to better the offerings for consumers. In this endeavour, the regulators would want to increase financial literacy, build industry scale, product choices, and a talented sector that can contribute to national economic growth and social development.
To be efficient for all stakeholders' benefit, can the financial services regulators have simple licencing conditions?
"If the industry-entrants (licence applicants) don't achieve certain business scale within a set time (say five years), do those sponsors lose their sponsor status and have to compulsorily merge their current-ops into an existing player to achieve a certain scale?"
This would ensure the attention and seriousness of business-sponsors in choosing the right talent and business model mix, be prudent about capital allocation, and focused on consumer insights of their financial product needs.
Mere license-hoarding won't help anyone.
(The author is an independent markets commentator.)