“Deep Pockets” need not be the sole criteria for Bank licenses

A day after the announcements of the 2013 Banking license aspirants, debate has started on whether RBI will dilute its norms to favour any of the licencees either before or after the granting of the license. The statement of the Finance Minister about the number of licensees is an indication of the high level of political interest in the licensing game.

Knowing the trends in political developments in the country and the approaching elections, the licensing decision will come under heavy political pressure. Hence responsibility lies on RBI to ensure that the licenses will not be issued in consideration of the political or financial clout of the applicants. RBI should recognize that Banking industry is a sensitive industry which can make or mar the country’s economy and if bad decisions are taken it will be the common people who will suffer.  Already many of the decisions taken by RBI in the technology banking areas are “Anti-Consumer” and some of the Banks are able to challenge the RBI on various regulatory aspects. Though some of the senior executives of RBI are trying to stand firm, the presence of continuing pressure on them to support vested interests is evident. These forces are likely to come to the fore once again when RBI starts  evaluation of the banking applications.

One of the criteria that will influence RBI in its decision is the “Deep Pockets” of the promoters. Many analysts seem to think that “Corporates with deep pockets need to be preferred by RBI”.

Some corporates seem to have already started lobbying as this statement in a prominent website reflects

 “…very serious players with deep-pockets like corporates are the likely beneficiaries while non-banking financial corporations are the likely losers as they will have to comply with stringent norms such as the cash reserve ratio (CRR), statutory liquidity ratio (SLR) requirements on day one and will need to transfer their entire lending book to the bank itself.”

(Refer this article in FirstPost)

In line with this thought, discussions are rallying around the “Deep Pockets” of Corporates as the main criteria for selection.

One of the arguments that analysts have put out to support large Corporates is that they may be in a better position to meet the  CRR/SLR than others. It is as if they are expected to meet the CRR/SLR from their “Deep Pockets” rather than the new demand and time liabilities they raise as part of their Banking business.

There is no doubt that “Adequate Capital” is an important criteria for success and should be considered for granting of license. It is for this reason that RBI is stipulating a minimum capital criteria of Rs 500 crores. Many analysts are speaking with the assumption that the licenses should be granted with the consideration of how much more capital the promoters may bring in case they fail to manage the business properly with this capital limit. It is as if we are presuming that groups will start the business with a serious prospect of failure in the first few years and have to be bailed out of the “Deep Pockets”.

It must be recognized that “Banking” is not “Money Lending”. It is not expected that these Banks will be doing business with their own capital. The role of the Bank is to “Mobilize public savings” and “Channelize them to meet proper requirements of the society”. RBI has therefore rightly indicated “Financial Inclusion” and “Priority Sector Lending” as also the principle considerations for licensing. The stability to a Bank comes from their ability to build a large base of small investors and to successfully recover from the borrowers with or without the power of the notorious and mafia driven recovery mechanisms.

I request the analysts who are advocating that Big Corporates are to be favoured for licensing to think if these companies have the wherewithal to manage numerous branches and undertake the responsibility for “Financial Inclusion” and “Priority Sector Lending”. I am sure that they are looking to “Manage RBI” when a situation arises where they need to meet these requirements.

I seriously suspect if many of the new generation Banks which are already in business have fulfilled these obligations. These Banks simply ignore RBI guidelines and play on RBI’s inability to force compliance. It would be better if RBI clarifies on whether the current new generation Banks are fulfilling their social obligations and if not how RBI will ensure that the new licensees will fall in line.

When some analysts feel that the norms are likely to be diluted in due course (Refer this article in Economic Times) perhaps what they mean is the dilution of these Banking norms more than the equity holding norms.

If RBI is loyal to the Banking industry, it should give good weightage to the ability of the licensees to meet the social obligation of Banking. Looking at some of the names in the license aspirants, it appears that there is a grave danger of many undeserving promoters getting the nod. 

Some of the large Corporates who are in the fray are likely to be those who are looking at this opportunity to manage their own Banks with which they can carry on their havala and money laundering operations under the official banner of a “Bank”. They are likely to channelize the funds to their own sister concerns and speculative real estate opportunities besides political funding. These corporates are adept in showing large investments in one account and withdrawing them through other channels. Hence their financial strengths may be only illusory. Their “Deep Pockets” may be only in Swiss Banks and will be used only for their personal welfare and not that of the welfare of Bank they promote and less so thewelfare of the  public at large whose interest is at stake in the process of these licenses. Such corporates will only chase profits from the business and donot hesitate exploiting the public for their personal gains. These “Money Chasers” will corrupt the industry and convert the Indian Banks into “Money Sharks”.

It is a financial truth that “Equity” is the most expensive form of capital and those who finance the business with their “Deep Pockets” will extract the most returns from the business. Hence the mantra for success in Banking is “low cost deposit  mobilization” and “Efficient Recovery”. Only those companies who have these abilities will succeed and it is this strength that needs to be spotted amongst the applicants by RBI when it takes the final decision.

I therefore urge RBI to ring fence itself from political influences and ensure that licenses are granted only to the deserving candidates who while meeting the capital needs prescribed have a “Social Objective” to serve the community and have the ability to mobilize savings and deploy funds at the grassroots level. If not, the new licensees will become one more problem in the Indian society. (Also refer this article “..is it a threat ? or Opportunity?”)


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About Vijayashankar Na

Naavi is a veteran Cyber Law specialist in India and is presently working from Bangalore as an Information Assurance Consultant. Pioneered concepts such as ITA 2008 compliance, Naavi is also the founder of Cyber Law College, a virtual Cyber Law Education institution. He now has been focusing on the projects such as Secure Digital India and Cyber Insurance
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