The first rule of any financial investment is “not to put all your eggs in the same basket.”
We have heard this term repeatedly from any and most financial advisors. Diversify – into different sectors, groups – make a diversified portfolio.
If one industry is not doing well, one can still leverage with and through other sectors that may be doing better.
Hence, the impact of negative growth can be offset with positive growth and, if done right, also make a profit!
Mr. Ashok, an employee of Reliance Industries, holds a corporate salary account with Reliance Bank. He is looking to purchase a house for which he needs a home loan; he is recommended to take the loan from Reliance Bank as he works within a conglomerate and holds a salary account with the same groups operated bank.
He is not sure if this would be a good equation in the long run – why? Because in the short term, while it makes sense and it would be convenient for him to have all his financial dealings with and under the umbrella of the brand, the company he works with.
He might even enjoy seme perks – a reduced interest rate on the home loan perhaps and some other small benefits since he works for the ‘brand’ organization.
But he can’t help but think if this would be an ideal deal; sometime in the future, suppose he switches jobs and joins another organization.
Would it not be complicated and hinder the process of exiting the organization, and would he then still enjoy the ‘perks,’ interest rates, as he does in the present?
The home loan is a commitment of several years, and professional equations related to work are fluid. Does it mean that he would have to continue with the company for as many years as the home loan tenure? Even if it means he is not getting promoted, his growth prospects with the company seem limited to him, and that his salary may not take the jump he hopes for.
The above scenario, though hypothetical, could very well become a reality and is a grim situation to be in and worthy of much thought.
The RBI constituted the Internal Working Group (IWG) on June 12 to study and review the extant licensing and regulatory guidelines relating to ownership and control, corporate structure, and other related issues.
The IWG, in a series of proposals, recommended the entry of corporate houses into the Indian banking space.
It proposed converting NBFC’s into banks and a hike in promoters’ stake to 26 percent from the previous 15 percent.
The group further proposed a hike in minimum capital for new banks to Rs 1,000 crores from the previous Rs 500 crores.
The draft proposal had led to quite a furor, with some in the markets, media, and the potential applicants celebrating the new development.
However, strong criticism poured in, both from former Reserve Bank of India governor Raghuram Rajan and deputy governor Viral Acharya.
What is the draft proposal?
PK Mohanty, heading the committee, has said that –
• Large corporates and industrial houses may be allowed as promoters of banks.
After necessary amendments to the Banking Regulation Act, 1949, and strengthening the supervisory mechanism for large conglomerates, including consolidated supervision, the above is to prevent associated lending and exposures between the banks and other financial and non-financial group entities, it added.
• NBFCs, i.e., non – banking finance companies with an asset size of Rs 50,000 crore and above, which may include those owned by corporate houses, may be considered for conversion into banks. This is subject to the condition that it has completed 10 years of operations and meets the due diligence criteria and compliance with additional conditions specified in this regard.
The draft proposal also listed specific other criteria and guidelines that must be met for the banking license.
Why is the draft proposal a surprise?
The draft proposal is indeed a surprise since, from the regulatory point of view – it is the absolute opposite of what has been believed for decades that corporate houses should not be given banking licenses.
Even globally, granting a license to corporate houses to operate as banks has failed miserably.
Questions that should be raised about the proposed draft
• First and foremost, in India, there is no dearth and shortage of controversy on even small matters, and the debate over granting of licenses could be another controversy in itself
Can we assume that utmost transparency in the licensing process and that no corporate house would be favored more or less on the issue of who and which corporate house will get the banking license?
• Can the corporate houses under stringent regulatory watch and detailed disclosures and proactive communication – work?
Even if they already own financial institutions, the rigor of banking regulations, and constant scrutiny of the larger corporate group, can they accept it all and work independently.
• The most important of all questions is the timing of the proposal – in the current covid -19 context, and the recent banking scams wherein it is the depositor, the customer who is suffering from limitations on withdrawal amounts, and the possibility that they may never recover their money, is this the correct time to be experimenting when our banking system is already faltering?
• Giving licenses to corporate houses also raises the possibility of concentration of economic powers to these corporates.
• When the industrial houses need financing, they can very well approach the very banks they have founded, thus making financing easy and with the least set of questions.
This raises the critical question – is it possible for banks to make good loans in their books if the borrower itself owns it?
• Will this not raise the possibility of concentration of political powers with ceratin business houses. There are already allegations and accusations on some business houses of being favored by the governments; thus, politically connected business houses may enjoy the most significant benefit – of having the option of applying for a license and operate as a bank.
This could also be dangerous for Indian democracy, as the political connectedness could help raise funds, money power in the Indian political system, which is already corrupted.
The above are just some of the more solemn and critical questions that should be raised and contemplated if and when the licenses to industrial houses are given.
With the country already struggling on the economic front, the looming Covid -19 pandemic, the banks fraught with scams and defaulters, the links between industrial houses and various political parties, and alleged favoritism – the resultant mix could be lethal and poisonous for the citizens of the country and the future of democracy.