Literature frequently offers eloquent illustration of the evolution of public policy. In Lewis Carroll’s Alice’s Adventures in Wonderland, Alice asks the Cheshire Cat: “Would you tell me, please, which way I ought to go from here?” The Cat points out pertinently: “That depends a good deal on where you want to get to.” Alice says, “I don’t much care where…” to which the Cat says, “Then it doesn’t matter which way you go”. The Q&A is an eloquent metaphor for the fog enveloping policy discourse.
Last week, the Reserve Bank of India released the Report of the RBI’s Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks. The 100-page report, riveted with history and international practices, is pious intent wrapped in the thesis that one necessarily, with or without sufficient conditions, leads to the other. To confound consensus, it came embedded with what digital platforms call ‘click-bait’. Recommendation No 14 mooted that “large corporate/industrial houses may be permitted to promote banks”.
The distrust of moneyed folks managing public money has a long troubled history. In 1913, a committee led by Louisiana Congressman Arsène Paulin Pujo in the United States to investigate ‘concentration of control of money and credit’ by a cartel, found officers of J P Morgan and the group held “341 directorships on 112 corporations“. Fifty years later in India, in the runup to nationalisation of banks, detailed in my book ‘Accidental India’, a committee on banking revealed a lethal corporate nexus — directors of 20 leading banks held 1,452 directorships and controlling interests in 1,100 companies.
Yet, five decades after the 1969 nationalisation of banks, the committee found merit in changing the status quo — even though, curiously, by the committee’s own admission, “all experts except one” were against allowing large corporate/industrial houses to promote a bank. The suggestion triggered pungent criticism. Social media was abuzz with posts/ memes about Ambani and Adani, Tatas and Birlas setting up banks.
It is entirely plausible that the business houses may be interested in setting up banks as ventures to further diversification and expansion — for instance, Mukesh Ambani to accelerate growth of the Jio platform and Gautam Adani for expanding his footprint in infrastructure. Be that as it may, in the rapidly evolving financial sector, would an industrial house though want to/need to own a bank when the option of 15 per cent nonpromoter holding backed by proxy of funds can influence outcomes?
The question that begs to be asked is if ownership is the problem or quality of regulation?
The fact is the RBI is in-charge of competing compulsions and is, therefore, incapacitated where it matters the most. In theory, the RBI armed with the Banking Regulation Act of 1949 wields de jure powers which far outweigh the facts of ownership — from appointments to superseding of boards. Yet — as validated by scams and failures, of private banks and more importantly in public sector banks — much is left to be desired.
Interestingly, there is no pushback on industrial houses managing financial assets such as mutual funds and insurance companies — for instance, the Birlas, Tatas, Mahindra, and Sundaram among others. Again some of India’s better run non-banking financial companies, trusted by depositors and borrowers, are run by industrial houses — for instance Bajaj Finance and Mahindra Finance.
It is true that concentration of economic power aggravates asymmetry in society and worsens inequality. Equally, the absence of access to banking has only exacerbated the march of inequality. The Report sets the context stating that the aspirations of the Indian economy for the future “may require a fundamental rethink of current regulatory stance towards the question of how a banking business should be organised.”
India does need more banking but does more banks equal more banking? Is capacity the issue? Mind you in the past six years, the government has added 410 million new accounts under the PM’s Jan Dhan banner purely by leveraging existing capacity. Yet, those in the informal economy continue to be denied credit. Agriculture is a priority sector but in practice norms are diluted and lending de-risked through instruments such as RIDF. India Post with over 150,000 branches, best placed to garner savings and deliver credit, is a victim of systemic neglect.
The crux of the issue is the approach. What needs to be done must follow who needs banking the most. As elsewhere, the demand and supply of credit for the urban economy may migrate from banks to bond markets. To foster growth, the focus has to be on addressing the unbanked at the bottom of the pyramid. This requires dismantling of brick and mortar mind-set, crafting an eco-system which can leverage the power of technology, enabling platforms for network effect.
Evidently all of this demands policy innovation. To paraphrase Lewis Carroll, it is no use going back to yesterday as India was a different economy then.
Author of The Gated Republic, Aadhaar:
A Biometric History of India’s 12 Digit
Revolution, and Accidental India